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

Thanks, everybody, for joining. This is Paul Lejuez, Citi Group, joining you from our Miami Consumer Conference and I have the pleasure to be here with Levi's management team, CFO, Harmit Singh; and in IR, Aida Orphan. Thank you guys for being here. The format of this is going to be very informal. It's going to be Q&A. And what we'll do, we've got some investors sitting here with us in the room. They'll be free to ask their questions. I'll probably kick things off with 1 or 2 of my own. But thanks, everybody, for joining us.

Harmit, thank you again for being here. Maybe just to kick things off. You guys have had a lot of changes in 2024. I think you've spoken about that year as a year of transformation. Maybe can you talk about some of the changes that you made to the business and processes, maybe what else is coming in 2025, maybe if we start there?

Great. Good afternoon, and thanks for joining us. Thanks, Paul, for having us. Sunny Miami. It's sunny in San Francisco, but not sunny in most parts of the Midwest and East Coast. One quick comment. We are in the middle of a quiet period, so I'm not going to talk about financial performance or guidance or trends for the quarter. Reference to guidance will reflect what we talked about when we reported Q4, which was late Jan of this year. To your question about transformation. I'll just put this in context. I'm a firm believer that a healthy company is a growing company and the growing company needs [indiscernible] transform. The transformation is largely driven by what I call a changing consumer dynamic. If you just reflect what's happening this year on the regulatory tariff environment, a constant environment that's changing technology, and consumer preferences are changing. So transforming is not a bad thing. I've been with the company a little over 12 years. This is my third transformation in the 12-year period. The first was when Chip and I got here, we were looking at a company that hasn't grown the top line borderline in [indiscernible] highly levered balance sheet, very little innovation and a business that was more wholesale. And so our remit was, let's take costs out, let's bring innovation in and reset the business. In 2015 to 2019, actually, we grew nicely. We were up 6% a year, and then we did the IPO. So that was the first piece. The second was post-COVID, everybody had their hunker down and things [ looking ] differently. And we really focus on digitizing the company and accelerating our e-commerce business as well as we took some costs out, and that really led to '21, which is the best financial year on record. And our EBIT margins were up over 12%. We were growing nicely and financially a great year. And then '24, you saw transition of CEO. We had a period like '23, where growth was largely flat. And the pivot was really towards a DTC first company. As you heard, we'd like our direct-to-consumer business, which is close to half of our business to be more like 55% and not the 55%, where wholesale is a great complement to the DTC business. But we're really setting ourselves to be a company going from $6 billion to $10 billion and operating margins growing to about 15%. So what's underpinning this strategy, basically, a couple of things. The first is, I would say, narrowing our focus, okay? So we're exiting low margin, low profitable businesses. Denizen should be complete by the first half of this year. We've announced plans to exit Dockers, I can talk more about it, but feel good about completing that in '25, and we shut down a small footwear business in Europe. So that's the first piece. We are also exiting some of the lower unproductive SKUs that we have as we make room for the newer pipeline, et cetera. And so that's really the first focus. How do we narrow the focus and really focus on growing and accelerating Levi's and importantly, growing beyond [ Yoga. ] The second is, to your question about focusing on the ways of working, what we've really -- DTC-driven companies have a shorter go-to-market calendar. Wholesale companies have a longer market calendar [indiscernible] go-to-market calendar about 16 months, really focusing on reducing that to 12 months, just hired somebody [indiscernible] going to be driving. This as part of some recent leadership changes, and I'm happy to talk about that. We've also, as DTC first company, driving more directive [indiscernible]. So as we introduce new outfits, new silhouettes, new innovation, you'll see more of that commonality across the world. So that's the second piece what I call changing the ways of working. The third is really driving productivity in direct to consumer. And it is not only about cost, it's about also growing top line. And so as an example, we have introduced that in the U.S. Our U.S. mainline, which is full priced store revenue has grown very nicely over the last couple of years. We haven't publicly talked about it, and we talk about it when we report Q1 earnings. But that's largely because we said our store associates currently at that time had about 70 different tasks. We narrowed it down to 6, so they can focus on selling. We have changed our labor model that's driving higher productivity, and we're introducing newer styles and fits as well as sorting our stores more between -- balance between women's and men's, and that's really helping grow the women's business. Last but not the least is leadership changes. Last year was about fixing and refining the strategy. Earlier this year, we've aligned our structure to that strategy. So for example, we have one person looking after product and merchandising [indiscernible] one. The second is our commercial teams are more aligned to our supply planning and demand planning [indiscernible] recall in '23, it was a period of [indiscernible]. And I'm personally leading the transformation for the company for that matter. So there were some leadership [indiscernible] so that's really what's happening from a transformation. And this is really setting us up to get to $10 million [indiscernible] margins.

Got it. And maybe before we open it up for everyone else to ask that question, maybe just hot topic sourcing exposure just given the tariff uncertainty. Can you talk about what you build in as far as tariff pressures, your primary exposures? And just ultimately, how do you think it all kind of shakes out for you guys?

Yes. It's a fluid situation involving not only by the day, but probably by the minute, all of you know. And volatility is never great for either the businesses or consumers. We've been at this for over 150 years. A couple of things. In fact, a, we cross-sourced from about 25 different countries. And no one country is probably over 20%. So there was a time when we were reporting in the mid-teens as a percentage of sales from China into the U.S. Today, it is less than 1%. So we were able to cross-source it. Our vendors have factored in different countries. That's one piece. Second is imports into the U.S. and Mexico are approximately [indiscernible]. And so as we think about making sure that we're able to respond and react and we've got different scenarios [indiscernible] in every option out there. The only other piece, I think, to note is that we just take Mexico as an example. Mexico imposed -- they increased their tariffs [indiscernible] Mexico sometime in December of last year. We've just taken pricing to kind of offset it because we have pricing power. The brand is in a very good spot, and we feel the consumer is generally resilient from that perspective. So as we think about different options as and when tariffs are imposed, the key for us to really think through is how do you mitigate it. Given our current exposures and imports into the U.S. from China and Mexico, I think '25 will be fine if that's where it is at this stage. If it's more universal, then we'll respond and react accordingly from that perspective. And we have to take pricing, which is unfortunate because you don't want to pay the consequences [indiscernible].

So open it up.

Maybe just for clarification, what is the largest country [indiscernible]?

We haven't disclosed it. Most of our sourcing is largely Asia, some North Africa, a little bit in Mexico, as we talked about. But it's primary Asian countries and Asian countries are Bangladesh, Pakistan, Vietnam. We have very little import into the U.S. from India, for example, most of the product in India is made for India.

So you feel comfortable with tariffs as they're currently being discussed and then [indiscernible]

Correct. Correct. And like most companies, given that there's a bit of a pause with some of this is coming, we have tried to do what we can to bring things in earlier. But in a business -- and it's good for us because our business is largely [indiscernible] not less fashion than some fashion competitors. But there's only so much that [indiscernible]

I'm assuming that [indiscernible] gross margin basis.

Yes. So the way to think -- so the answer is yes, but let me give some color. If you think of our DTC, so it is our stores and our e-commerce, right, which is close to about 10%. E-commerce is close to 10% of the business. The combination, as I said, end of last year was 47%, grew, I think, 3, 4 percentage points from a year ago, underway to 55%. I think in '23, when our overall EBIT margin were about 9%, last year, we ended a little over 10%. DTC margins were probably in the low teens. Last year [indiscernible] was high. So we want to continue to improve it. The 380 basis points is a factor of a couple of things. One is higher revenue per square foot, which is driving higher productivity. And as I said earlier, a better productivity on our cost structure to drive higher EBIT margins as well as e-commerce is now everything in all costs allocated is low double-digit margins. There was a time [indiscernible] negative. And I think '23 or so [indiscernible] it was in the low single digit. So it's grown nicely. As we think about growth, DTC, we'd like DTC to be north of 55%, growing in the high single digit as we have guided earlier in the year. In the last few years, DTC has grown nicely. It's a combination of [indiscernible] comp sales, [indiscernible]. Does that answer your question?

Yes. [indiscernible]

Yes. No highly [ levered ] question. So the way we are structured is we have a head of commercial for Levi's. So that is all channels, right? There's stores, there's e-commerce as well as wholesale. Under [indiscernible], who we hired late last year, he came from Burberries, basically a retailer. Under him, our Managing Directors of 5 or 6, what we call markets or -- so you have the U.S. and Canada, you have LatAm, you have Asia, et cetera, et cetera. And so each Managing Director of a cluster is responsible for all channels. We also have the Chief Digital Officer, who basically picks up every morning and [indiscernible] really focused on growing e-com. That's what I call a good metric because he's got a team there focused on growing e-commerce business. And so that's the way it's been structured.

[indiscernible]

Yes. cluster has. And under East cluster head, we were structured -- there's a head of retail, which is stores. There's a head of wholesale and there is a head of e-commerce. So there's a dedicated focus on each of the channels. Now under my wonderful transformation remit, I have a work stream okay, that's called driving productivity of direct consumer. And so I have a small little group that's saying, okay, how do we drive higher revenue per square foot? What do we do to drive better cost measures? And how do we drive better working capital? And so this is a wonderful metric that works, and that's how -- and the reason profitably DTC -- growing productivity in DTC is so important is because the wholesale EBIT margins, as you know, are slightly higher than DTC margins. And then it becomes a higher DTC business, you have to start closing the gap. And we're narrowing the gap, it'll never be the same. But if DTC is growing at whatever 5, 6x the pace of wholesale because our expectation of wholesale at least 2025 was flat in DTC in the high single digit. Obviously, it's going to drive higher leverage on your cost and drive higher profit.

It sounds like for us [indiscernible]

Fist of all, I love your jacket.

I was an operator [indiscernible] 5 years.

That's good. It's good to have an operator in Wall Street. So to your question about -- sorry, the question was -- yes, the men's. So what really happened on men's, and we had a real good quarter for both men's and women's, and the men's business grew nicely. What really happened is the styles and the silhouettes really moved to [indiscernible]. Our view was that's this is way we've seen trend over that women gravitate to what's happening on trends first, and it takes a little longer for men's to get there. And so -- but what we noticed was the move to the looser baggy outfits started accelerating in men's. So we were not ready. From a product perspective, we chased into the product and it hit the floors. So we're ready for holiday because we had a very strong holiday. And so that made the big difference.

[indiscernible]

Yes. sorry -- yes. Sure, sure. And I mean, men's was growing in different parts of the world in our own stores. It was not growing as much as in wholesale. And wholesale has improved because inventory is a lot leaner, financial wherewithal also got a lot better, especially in Europe. We saw that [indiscernible].

[indiscernible] collaboration.

Yes. No, it's working well. It's not a big collaboration. Yes. It gives us good brand from that perspective, but it helps grow the brand. The bigger partnership, obviously, is beyond partnership, which is making a big difference.

Factors [indiscernible] shut down. So I mean, how do you envision the business because there's a lot of moving parts when you report, it always seems like the DTC [indiscernible] good and then all these other things are out of that. So it's hard to understand like how we think about it going forward when some of this stuff [indiscernible]

Yes. No, it's a question that we got a lot last year as -- and it was confusing. And so this year, we will introduce a metric called organic net revenues. Organic net revenues really helps both us internally because it's across the company as well as externally and for all of you understand what's the true growth in the business. And so organic net revenue which we introduced as we reported in Q4 is largely backing out the [indiscernible] plus the business [indiscernible] and the business is very good [indiscernible]. And so the -- if you think of quarter 4 on a reported basis, I think quarter 4 was up 12%, but the organic growth in net revenue was up [ 8% ] because quarter 4, for example, [indiscernible]. So that's also backed out. [indiscernible] we haven't exited [indiscernible]. And that will happen when we closed the transition, but Dockers is a good candidate for a [indiscernible]. And if that happens, we see the change both in '25.

[indiscernible]

Yes. So Dockers in the U.S. is primarily -- so let's think of the business. Dockers, I think at this stage, we haven't talked a lot, but it's about 50% international, 50% U.S. The U.S. is primarily wholesale. And if you think of the wholesale direct-to-consumer segmentation, I would say, 60%, 65% wholesale, 35% international. That's really the [ Dockers. ] Dockers business is a little over $300 million as of 2024. Gross margins probably slightly under 50%. And it's -- the EBIT fully allocated, and I'll explain to that -- about that in a minute, it's probably breakeven. And so a couple of years ago, as we really wanted to focus on Levi's and Dockers, we had a better choice on Dockers, do we do what we're doing now, which [indiscernible] to drag? Or do we take a last effort to try and do what private entity does, which is [indiscernible] have a dedicated team running it compensated completely on Dockers. That's what we decided to do. And when we decided to do that, we said [indiscernible] allocated basis. That's why I think the Dockers [indiscernible] breakeven. And so that [indiscernible]. The reason we're getting out of it is it's a brand that we created. In fact, I was talking [indiscernible] a couple of days ago and [indiscernible] was created in the late '80s, largely as casual [indiscernible] but it's a category that's growing low growth and margins are [indiscernible] as we narrow the focus on Levi's [indiscernible] give it to somebody who can actually take it.

If you do give it to someone [indiscernible]?

Yes. I mean, it's -- they're different categories. If you just think of the casual fan space with Levi's with our [indiscernible] and our performance tech and everything else is the market share of Levi's is probably slightly higher than Dockers. And yes, they're going to go for share of the closet, so [indiscernible] as leaders like we lead in the marketplace. I think it's our -- it will be [indiscernible] to maintain that leadership position.

Can you talk about use proceeds from percental transaction?

Yes, we haven't talked about it. We've talked about it as and when we have something more to report on Dockers. But the way we are thinking about it is basically 3 options. One is use the cash to grow the business. We're in a very good situation financially. And we have enough cash. Balance sheet is not levered. In fact, you probably noticed that Fitch moved us to investment grade. So we don't need the cash to grow the business. And we're spending about 4% of our revenue and capital to grow the business. So that's not a need. The second is should we pay down more debt. We've got $1 billion of debt. The cost of debt is a little over 4%. And so that's -- we feel we're in a good spot. We don't need to do that. So it really comes down to returning capital back to the shareholders. And so that's how we're thinking about it. We see the accelerated buyback. It could be a special dividend. So we'll come back with it. But basically, in the bucket of how do we return this back to the shareholders [indiscernible]

Anything as it relates to stranded costs that we should be thinking about?

Sorry.

Stranded cost.

As part of this wonderful transformation that we're doing, that's also part of, okay, how do you keep taking costs out. So stranded costs is part of the -- part of our thinking.

And that ballpark, what do you think disc.

I can't get into it. We're middle of the sale process. Now we can't -- I'll be negotiating against my self.

You said it's a $300 million yourself.

That's [indiscernible].

A little over $300 million.

Can you just [indiscernible] you're able to speak to just as relates to the consumer more broadly coming out of Q4, which you saw through the beginning of Q1. The last question is [indiscernible].

I'll try and go around the world. I think overall, our view is the consumer generally [indiscernible] I think the attraction to brands that are innovating, brands they can trust and products that are not more relevant, I think [indiscernible] we have enough examples around the world where we try and say, okay, here is something that's not working, let's discount it versus here is a new product, the [indiscernible] product. And so if you think around the globe, the consumer in the U.S. generally resilient, we're seeing it clearly in our direct-to-consumer business where the company experienced full line of assortments and it's our execution and that's been growing nicely. Europe, I would say, consumer in a better spot today than probably a year ago, right? Our Europe business, as an example, returned to growth in the second half of last year, right? DTC was up nicely. Wholesale [indiscernible]. And I was just in Asia a couple of weeks and seeing very similar trends. If you just take our Asia business between '21 and '24, Asia, I think, grew in the high single digit annually. Operating margins were up 300 basis points, and we opened a bunch of stores in Asia and so consumer generally feeling [indiscernible] in India also confident, very high [indiscernible] and so generally feeling good. Latin America, which is -- if you think of our business, [indiscernible] I said the U.S. is about 40%, Europe about 30%, Asia is [indiscernible] Quarter 4, the LatAm [indiscernible], it was a bit of a drag and back faster. Generally feeling good about the consumer globally. Difficult to predict what tariffs come in, the impact of [indiscernible] we can. Our product pipeline, and there will be a strong [indiscernible] relevant. So I think that's something [indiscernible] you kind of interact.

A little bit about the women's business. It's been really showing great signs of growth and I think in the fourth quarter, [indiscernible] nicely. Maybe like what are you embedding within our wholesale growth forecast for women [indiscernible]? How much runway there [indiscernible] that seems like a product you're selling out very quickly.

So if you take the women's business, 10 years ago, it was 1/5 of our business. I think at the end of '24, it's close to 36%. Our view is this should be above over time. And so a steady progression. And I think when yoga pants were taking off 2014, 2015, we sat back and said, do we get into that? Or do we really established products that are relevant for her, which is slimmer fit, a little bit of stretch and more comfortable, that's what we did, I think, in the fall of 2015. At that time, the business was over $800 million with gross margins of about close to 30%. The business was declining. Today, the business is close to $2 billion, gross margin higher than men's. So it's had a very nice growth. And we feel it can be a lot bigger going forward. So when we are opening stores trying to assort our different products, we're giving enough space for women's [indiscernible] that when she walks in and sees the stuff of the product is relevant [indiscernible] We're also -- and as we focus denim black style, we were not selling denim dresses and denim skirts in a [indiscernible], for example, and that's something that we've added to [indiscernible] last year, and that's really helped because they really reinforces the lifestyle in Singapore, the largest store and one could see different stocks in there, which is very good. The other thing that you'll see in Spring is what we call a blue tab. Blue tab is a premium version of our assortment. It is basically made in Japan or made of Japan, were inspired by [indiscernible] product. It's been in Asia for a while, does really well. ,does very well in China. And -- but we hadn't yet innovated around it, both for him and her and we just done that. So that's launched in Asia, doing very well. Coming to the rest part of the globe that should make a difference. So I think to your point, just being -- and the baggy fit has also made a difference. We introduced baggy fit just before COVID, and it's taken on and continues to do reasonably well. But we're not as concentrated in baggy as people saying we are because we sit back and say, okay, we learned this from the [indiscernible] was next and so we are thinking about the next [indiscernible]. The teams are thinking, okay, you have a baggy side [indiscernible] what's the next trend over time. So I think it's a constant dialogue perspective, but that's really what's driving that.

Is there a way to quantify the sales within your existing accounts?

Yes. No, I mean, it is an opportunity. Clearly, you've seen the success of what you introduced first in DTC [indiscernible] it moves to the other channels. We believe -- to your question, have quantigied it? Probably not. But it's in the $6 billion to $10 billion. When we say $6 billion to $10 billion, women's is a big piece of that. And women's growing at twice the pace of men's probably [indiscernible] and so -- and if it's gross margin accretive [indiscernible]

A clarification just on the call, you talked a little bit about distribution expense and what we should expect going forward. And I just wasn't quite clear. I know there's a component that was the duplicative DC overhead costs and then moving e-com. But that core distribution expense growth of 6% to 7%, does that include the DC expense? So going forward, we should expect it to be less? Or is it the core 6% to 7% the first half will also have some additional distribution on top of that?

Yes. No, I think the thing on distribution expense is between 6% and 7% as a percentage of revenue, right? Our objective is to reduce that. Okay, this year, because we've got these transitions taking place. Now as part of the recent reorg that's been given to me as part of my transformation, I'm working with the folks who try and figure how to reduce it. So the objective when we were running our own DCs, which we still are, but now we've got GXO running our DCs -- our DC in Germany and GXO, we've transitioned one DC here. The entire objective is because this is what they do for a living, that the cost per unit actually comes down over time in the short term because you're running 2 DCs, there is those transition costs. But over time, the SLAs that we have set up reduce our distribution spend. That will happen because they can add other customers [indiscernible] that leverage some of the fixed costs, but there's a lot more automation from that perspective. When does that reduction happen? I think you probably start seeing [indiscernible] and so as you think about one of the levers to get from say we end this year at EBIT margin at 15%, driving lower distribution expenses part of that. Does that answer your question?

Yes. But overall, the first half, we should expect to be higher just because those expenses will be phasing out towards the end of the year into '26.

Let's take Germany, for example, right? It's a new distribution center. It opened in October or November of last year. We're just ramping up. It's really services Europe, we're ramping up. There's a process for ramp up. And I think we probably get to steady state or normal state sometime by the end of the first half. So I think when we get that, then we start seeing some productivity improvement. So the first half, you'll see some of that. And it will -- I think I've said this before to some of you. It also -- because you can't service all the demand because you're ramping up. So wholesale as an example, in Europe, the pace of growth has been much slower in the first half than the second half. You don't see that problem in the U.S. [indiscernible], et cetera, et cetera.

I'll just finish with one. Can you maybe talk about U.S. wholesale department stores, mid-tier versus premium, trends in both opportunities in both? Maybe we can end there.

I'd say the wholesale overall, probably more stable than it was a year ago. It was [indiscernible] about a year ago. You have seen that -- if you just look at the U.S. results, 5 consecutive quarters of growth with quarter 4, wholesale actually being positive, right? We've been cautious when we guided wholesale to flat, I think, in January, we're just cautious because it's an environment we don't control. Our department -- our sales in department stores has, over the years, gradually come down, right? So at the end of '24, department stores in the U.S. is probably slightly less than 10% of our total revenue. It was much, much higher years ago. And these are department stores, I mean think Macy's, think [indiscernible] et cetera. That's what we call as department stores. I think -- and Europe, for example, we've seen wholesale come back nicely in the second half of last year. So as we think about opportunities in wholesale, because wholesale as I said, is a good complement of DTC. And to the question that was asked earlier about women's, I think women's is an opportunity. I think getting into our newer styles [indiscernible] opportunity. It takes a little longer for them to convert, and they also want to see the proof in our DTC stores before they buy. They buy a lot of core. 511 to 501 et cetera, and so -- 502s were. And so converting takes a little longer because they got inventory, it takes a little time, et cetera. But I think they are -- I mean that's going to be seeing positive growth. They are in the process of converting to the newer styles. It just takes a little longer. It's a biggest system from that perspective.

Got it. Well, we are at time. So we will end it there. Thanks, everybody, for joining.

Thank you. Thanks for having us, and thanks for taking the time.