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

Okay. We got the signal that we can begin. So hello, everybody. I'm Jay Sole, UBS' retailing department stores and specialty softlines analyst. And we're here at the 2025 UBS Global Consumer and Retail Conference. And I am super pleased and honored to be joined by Harmit Singh, who is the Chief Growth Officer and Chief Financial Officer of Levi's. And the plan for today is we're going to do a Q&A session. Harmit and I are going to just go back and forth. And if you do have a question in the audience, definitely feel free to raise your hand at any time. There's a person in the back with the microphone. She can bring the microphone out to you. And this is being webcast. So if you do have a question, please wait until the microphone comes to you before asking a question. But to start off, I'm going to start with the first question.

And Harmit, thank you again for being here. But can you talk a lot about some of the changes that you made to the business in 2024 and in terms of really the company's ways of working and what do you expect for 2025?

Sure. First, thanks for having me here, and I appreciate everybody participating or wanting to dig a little deeper into our story. Just a quick comment. Otherwise, Aida will say, Harmit, you didn't say it. Aida is our Head of IR. We are in the middle of a quiet period. So I'm not going to talk about trends in the quarter, financial performance and everything else that may be top of mind for a lot of people, but can't do it here. To your question about the change. So as we think back, I've been with the company 12-plus years. And this is what I would call the third transformation happening in the last 12 years. The first was when I got here with Chip, who is the CEO at that point, the company hadn't grown the top line and bottom line in any 1 year for 20 years at the same time, right? It's either the top line or the bottom line, but not the 2 consistently. We were overlevered. We were skewed towards the U.S. We are skewed towards men's bottoms, and we were skewed towards wholesale. You added it up low growth, not investing for innovation, et cetera. So the remit was take cost out, grow the women's business, which was declining at that point, is twice the size today. It was about 20% of the business at that time is a little under 40% now and get to profitability. That was really -- and invest in innovation. So in the first piece, that's what happened. Between '25 -- between '15 and '19, we grew at about 6% a year and profitability improved, and we took the company public early '19. Then COVID happened. All of us went through a tough period. But we spent the time to really digitize the company, okay? E-commerce was about 4% of the business, losing money. And today, it is 10% of the business making money and EBIT margins are low double digit. And '21 was probably the best financial year on record for us in about 2 decades. EBIT margins grew over 12% at that point. The third transformation, then there was high inflation. There was -- the consumer in the Western world got a little weaker, et cetera. And there's been a CEO transition. So Michelle Gas has now been with the company 2 years. She took over as CEO about a year ago. During this period, they made me growth officer and recently, in some leadership changes, transformation has been added into my remit because I've done a few transformations even as part of Levi's. So basic changes -- our strategy is largely consistent. We're still brand-led. DTC first, where we really sharpened, we said DTC first, not DTC only, which means wholesale is important to us and then it's powering the portfolio, which is all about international and growing our brands. The first piece of the thing that began in '24 was narrowing the focus. We said there's some low-margin, low profitable business, let's exit them. So we're exiting Denizen in Target with a real focus of growing Red Tab in Target. We're exiting our footwear business in Europe, small business, about 1% of our total revenue growth, which is $60 million, $70 million. And we just announced the exit of Dockers. We are in the process of selling that. So that's the first piece of it. We are also reducing our SKUs as we introduce new products, we're reducing SKUs have taken 15% off. So that's the first piece. The second is changes of working. DTC vertical retailers have a shorter go-to-market calendar. So we've got a market calendar of 16 months. We're taking it down to 12. The new product introductions, whether it's the performance tech, whether it's skirts and dresses for her, they're really within that period right now. So that's the second piece. And we're becoming more directive in our assortment, so which our stores around the world will have common -- more commonality. The third is driving higher productivity in our direct-to-consumer business. So -- and that means higher revenue per square foot. It is a higher profit and more SKUs that are winning versus not. So as an example, our DTC profitability has gone from the low teens to the high teens. I mean we improved close to 400 basis points last year, and we think it will continue to improve. And the last piece is some leadership changes that we just announced, which is all about aligning structure with strategy, okay? And there, we have one product -- one person looking out of product and merchandising.- One -- commercial now has supply planning. I've been given transformation because my view is transformation is more than just taking costs out. I'm not the dodge of Levi's. It's more about growing revenue. It is more about driving higher profitability and improving working capital, okay? Our turns are 2. We want to get it to 3, the releases. So that's how we're thinking about it. Now to simplify all this because there's a lot happening, simplify all this, we came up with the organic net revenue definition, which is primarily what -- how is Levi's doing and how is Beyond Yoga. That's what we're going to be reporting going forward.

Got it. All right. So there's a lot to dig in there. I want to touch on something that I don't know if we get a chance to talk about enough, but on a public webcast like this, I think it's great to get it out there. The first thing you said was that Levi's is brand-led. And obviously, it's a storied brand, 165-year-old plus brand. And my understanding from covering the stock now for many years and talking to you many, many times is that protecting the brand integrity of the Levi's name is sacrosanct within the company. Now tell me about that. Tell me what about the company? What's in the culture that is just -- just in the company's -- in the company's character, in the company's culture to make sure that the Levi's brand is always protected and protected from any sort of the other brand degradation things some of these other companies do to their brands.

Yes. No one's asked me that in a long time, but the way I would think about it is, number one, the brand is relevant at any point of time. And it's relevant to changing consumer landscapes, changing consumer preferences. And so that's the first piece is make sure you have a product pipeline that is always offering something to her or him and it's across different demographics, something for an older person like me, there's something for a younger person like my millennial daughter, et cetera. So connecting with the youth, which is the next generation is critical. So for example, we lead with men's. We have taken over the leadership position in women's in the U.S. and we're connecting really well with the young. So having the right product is important. Plus having the product for the right -- for every relevant occasion. So bagger fits are important, but you still need the slimmer fits. So when my wife, for example, is wearing boots and she wants to wear a slimmer fit, there's a 7:1 for her. If you want some bagger fit, it's available. The same thing with us, men, we want something that's more comfortable. So we've got the performance tech, which is our non-denim line. There's a 5.11 or a 5.01 and now they have the -- I'm wearing the boot cut, there's something if you want a more comfortable fit. The other piece is very important that the core continues to perform. So we were the ones who created denim. 5.01 is how we started. 5.01 is still growing, right? It's getting closer to $1 billion. It still had a double-digit growth last year. So while you're introducing the new fit, your core has to continue to perform. So that's the first piece of it. The second is marketing, right? It's important. We spent about 7% of our revenue in marketing. There was a time we were spending much less. We were not on TV for a long time in the U.S. In some markets, we introduced that. So having we have signed up with Beyoncé, okay? She's an icon herself. She's been a fan of the brand. She named a song after us that happened organically, and that happened because she loves the brand. She was in Coachella wearing our shots in '19 or whatever without us knowing it, et cetera. And so now she's supporting the brand and partnership for us, and we've got this partnership for a while. So that's the other way of it . And the third is executing. We're getting better at it. When you go to our store, you should find our product, you should find your size. And that's why direct-to-consumer becomes so important, where we can assort our styles ourselves and the wholesale customers can come and see how this is working and buy into it. And so that's the, I think, would be the ethos of it. And because we think there's so much opportunity on Levi's, we narrowed the focus on other things that we were doing and said, let's exit.

So on the execution, let me just ask you one follow-up on that. The company, I feel like, has respected price and price integrity in a really good way. I think we've talked about this before, but I think when you got to Levi's, I think the average pair of the Levi's jean cost like $30 in the U.S., and now it's significantly higher. Obviously, one way to sort of pull a lever in the short term to drive some sales is to discount and promote, but that can sort of erode the pricing power of the integrity of the brand. It seems like the company has been able to avoid that. How do you keep that discipline? I mean. especially...

Yes. No. The -- it's a very good point. The -- our products provide great value for money. You go to a premium wholesale customer like Nordstrom and take our women's product versus some of the others. we have great value for money as an example. You walk into a store, you still get product for $70, $80, et cetera. So protecting the price value is important. About a year ago, as I was looking at the numbers and our products were actually hitting the mark. They're very relevant. I said to the folks, I said that a couple of things we've got to really take a hard look at. Are we growing gross profit dollars faster than SG&A dollars? What percentage of a product are we selling full price, okay? And when you looked at both, there was opportunity. And so we're really focused on driving higher full price, especially in our stores, right, because you can control that. especially when the product is hitting home. So those are the things we're looking at. We did some tests around the world, and I was sharing this with folks. I mean, I remember this discussion because we used AI a little bit. AI is effective is just determining the level of promotions and markdowns. And so in Europe, we had -- we were marking down product. Europe is going through a tough period. It's growing again beginning in the second half of last year, but it had some tough quarters. We had product that we are merchandising and marketing and marking down. And then we had new products. People were gravitating to the new stuff and paying full price versus gravitating to the old stuff, and that was marked down. So that just explains as a brand is really relevant. The consumer is thinking differently. And so the question is, if you have a product pipeline that is really strong, can you do more of it?

Understood. All right. So one other piece of the transformation, as you mentioned, is the lead times, especially from -- going from 16 months to 12 months. Talk about the challenges of making that happen. Obviously, the a company that's been a North America wholesale men's jeans business for a long time, and it's a certain way of doing business. And now you're a global multichannel men's and women's lifestyle brand, which is a whole another set of skills you're having to build up. Talk about what it takes to go from 16 to 12.

Yes. It's -- I think the biggest constraint and the biggest opportunity is the internal mindset of our merchandisers and product people as well as the mindset of buyers in our customers. they're used to a longer time line. They're used to taking a little time before they make the choice versus a shorter time line because -- and let's take it this way. Today, we're sitting in March, and we potentially are ordering product 16 months out. We haven't even seen how the current product is doing well. And it's largely the seasonal product. We have a lot of coke. We don't need to do 16 months for Coke. Coke can be replenished much faster. But it's just the way we've been operating for years. And so I think it's the mindset. Plus it's about using digitized tools. You don't need to get a product and see it, touch and feel it when it's probably the same 5.01 that you ordered for years or it's very similar, you could just order it just seeing the photos and the digital structure, et cetera. So it's basically thinking through that a little differently. And so it takes time. It doesn't happen overnight. And so that's what we're working through right now. But we'll get there. And if you get -- when you get there under my transformation remit because I said, okay, from 16 to 12 is very, very good. But what's the outcome, right? Are we going to get better sales growth? Are we going to drive higher gross margins? Is it going to be fewer inventory and working capital. And that's where I come in and say, okay, I worked with whoever was trying to do it and say, okay, now let me help you think through the outcome a little bit.

Okay. So interesting. Now to 12, is 12 sort of an average? I mean, like some things like core is going to get replenished and that product will get ordered in a 3-month span. Some Ts like graphic tees, batwing tees, whatever that's 4 months. And other stuff is maybe newer and more innovative and has new fiber technology, whatever, that's like 16 months. So is that 12 really a blend of a lot of difference things?

12 is a blend of a lot. But what happens is if you're conservative, which traditionally we have been, everything gravitates to the average. And so we have to -- maybe the tops piece as we grow waist up because that's an opportunity for us, gets a shorter go-to-market. Some things that are a little bit more -- some fashion, a little bit of fashion risk, et cetera, a little longer. So I think the average will be 12, but that's a good -- cutting 4 months out is -- will have a tremendous impact, especially if DTC is going to be -- it's close to half of business today, but if it's going to be 55% or 60% of the business, then it gives you the license to do it.

Got it. I mean, is there a trick a management technique to getting people to change their mindset, right? Because that's such a fascinating topic. I have to ask you because you have so much experience in this area, and I just ask [indiscernible].

I think it's been tough. I mean it's not that the last 12 years, this is the first time we looked at it. We looked at it. You have product people saying something, you have merchants saying something, you have commercial people thinking differently. And so that's where the new organization changes where product and merchant is under one person, planning is with commercial transfer. I think this is probably our best shot of making the change. And Michelle is completely behind it. The Board actually wants this. And so I think we have a good shot of making this happen. I think people will make the difference. People understand why we're doing it. And so I'm more confident today than I was in the last attempt a couple of years ago. Sounds great.

Sounds great. All right. Well, that was great. Let me -- I want to ask you some topical stuff. I know people are interested. I want to ask you the tariff question. I guess, what impact do you expect current and future tariffs have on the business?

Yes. So First, let's talk about our business and where we buy what from, right? So let's put those facts in. So we cross-source from 25-odd different countries, primarily Asia, some North Africa. Very little is manufactured in the U.S. I mean if you take the apparel sector, 98% of what is sold in the U.S. is manufactured outside the U.S. Beyond Yoga, which is an L.A. brand that's grown up in L.A., has quite a bit of manufacturing in the U.S. and L.A. But we're -- now as we grow that, we're taking that also overseas. So that's fact number one. And over the years, we have been able to cross source from different countries. I mean it's not difficult to manufacture our product, right? You need to have our quality controls and you need to have the styles but it's not -- I mean, there's not a lot of fashion forward stuff that we have. So you can make those shifts over time. So China, for example, today that we're importing into the U.S. from China is less than 1%. Mexico is about 5%. China used to be close to 15%, 16%. And so over the years, it's come down. And we have quantified the impact of, let's say, the 25% tariffs in 2025 will be minimal. We'll be able to withstand that from these 2 markets. We've import -- India has been in the news. We import very little from India right now. Most of the stuff in India is made for India. Most of the stuff in China is made for China, et cetera. So wherever we could do that, we've been able to localize. And so that's -- financially, that's how we're thinking about it from the company's perspective, as an example. And where we need to take price, we will take price as long we have pricing power and it doesn't hurt the consumer. So as an example, in December of last year, Mexico imposed tariffs on product that was imported into Mexico. And we've just taken pricing in Mexico to offset that. We have pricing power. The brand is doing well. The consumer is in a good spot, et cetera. Now the other piece is the impact on the consumer, right? And it's such a fluid situation. It changes by the minute, by the day and by the country. And so we'll work that out. Overall, generally, what we are seeing, the consumer has in the U.S. largely been resilient. so far. The denim category is having a moment. We are growing share. We just saw our January numbers on market share. We've just continued to improve that in the U.S., et cetera. So I think time will tell on the impact on the consumer and where this finally nets out, but we'll not be alone because I think in the short term, it's probably a competitive advantage to us because we're not importing a lot. Long term, we'll try and figure it out like everybody else.

Okay. Let me follow up on that market share point in the denim category. Can you speak to the category outlook and the market share and their positioning in the category?

Generally, we've been able to grow faster than the category. I mean you take last year, globally, I think the category was up 1.5%, 2%. We were up 3% organically. '15 to '19, which I -- the reason I go back to '15 to '19 is they were probably the most normal years. And then we had COVID and '21, you could say there were some vengeance buying or whatever it is. At that time, the category was growing low single digits. We were growing at twice the pace. And so generally, our view of the world is we'll probably grow faster than the category. Now if you look at the numbers, Euromonitor's numbers for the next 4 or 5 years, the annual growth of the category in the low mid-single digits, right? And so that's why if you think of our progression as a company, '23 organic growth was flat because U.S. and Europe were having their struggles, the consumer was struggling. '23, we grew organically at about 3% and '24 -- sorry, '24, we grew at about 3%. '25, we have guided 3.5% to 4.5%. Our desire to get to mid-single-digit growth and the company from a little over $6 billion gets to $10 billion over time. Our gross margins were in '23 under 58%, slightly under 58% was a record 60% gross margin. In '25, we're guiding about 100 basis points higher at 61%. And our EBIT margins have also seen a nice progression. There were 9% in '23. They were a little over 10% in '24, and our expectation for '25 is close to 11% on the way to 15%. So as we think about it, that's where we think about the category. Now you have to be relevant. The other thing we're doing is we're reminding the consumer and ourselves that we are more than denim, right? It's not necessarily beyond yogurt, but it's beyond denim. And the way where we think we have the license to play is in denim lifestyle. So think the jacket I'm wearing is inspired by denim. The shirt I'm wearing is Indigo inspired by denim. So we're introducing linen in the spring, but it's denim-inspired linen, right? And the other thing we're doing is looking at our non-denim line because most of you here don't necessarily wear denim every day to work, but you can wear a casual, you can wear something similar to the ABC lulu lemon pant. So that's where we introduced the performance tech, and that's a nice additional layer. We have introduced Kirt for her, dresses for her because skirts and dresses, a category is growing. Performance tech as a category is growing, Activewear has been growing at a faster clip than just pure denim. So those are the things we are exploring right now.

It's very interesting, right? So expanding from just a denim is to a lifestyle brand, we can sell many categories. Have you seen any resistance from the customer in terms of them saying, "I trust Levis for denim, but I'm not going to buy skirt. I'm not going to buy a button down shirt? Have you seen any issues?

No, we haven't seen resistance on the consumer. Our biggest opportunity is driving awareness, which is you wake up in the morning and you want to shop denim, you want to shop denim bottoms, you think of Levi's. When you think of tops or waist up and the other things are non-denim, we'd like the consumer to start thinking of us. And so that's why the Beyoncé campaign, you've got the T-shirt she's wearing, you've got the trench coat that she's wearing beside the rip cage, which is what people know we sell. And so like in India, for example, we've just signed up with a musician in India called Diljit Dosanjh, and he's more lifestyle, right? And so we're trying to bring that marketing back. You'll see a lot more product marketing in our marketing going forward than you have seen in the past. And so that's how we're thinking through it.

And just -- we've talked about this before, but I just think for people to know, the ratio of bottoms to tops...

Yes, it's an interesting thing. When I joined the company, it was 7 bottoms to a top, right? Best-in-class retailers 1:1. I think last year, we reported 2 bottoms to a top. There are markets like India, for example, now I think it's 1.3 tops to a bottom, okay? So we're progressing, but it takes the time. And that's a good -- that's an opportunity to make it more denim lifestyle. Now having said that, the areas we are focused on, whether it's women's, whether it's DTC, whether it is international, they are higher gross margin than the company. And so they're gross margin accretive. And so as we think about it -- and the reason women's is higher than men's is because -- and it was 30% or so 10 years ago, and now it's much over that is because we have good volume, okay? It's growing, and it will get that. So as we sharpen the focus on waste up or tops, okay, our focus is it shouldn't be margin dilutive. And as we build volume, it gets margin accretive.

So on that, you made the point earlier about it's about educating the consumer, raising awareness of the other categories besides denim. And the company has gone through this process of opening up what you call the next-gen stores over the last couple of years, been successful, rolled out these smaller stores, kind of can go in the top malls. How much of that is an unlock? Meaning having your own stores of sizable a few thousand square feet where you can show all the denim, obviously, and then all the new categories and introduce all these other things to consumers to raise their awareness. Like how much is the store an unlock for the opportunity to sell more categories, but also just make consumer aware of what you're doing [indiscernible].

Yes. No, I think it's huge. We can't go over. We just can build larger stores, but it's a huge unlock because when we assort what we really want to sell, we're able to sell, right? It's not -- and to your point, that it's evidence that consumer will buy, right? So when we assort a store, 50% women, 50% men. Lo and behold, the mix is 50-50. When we have more tops, like in India, we have more tops, the mix is higher tops than bottoms. So I think the consumer is giving us the license to do it. And we just have to do it thoughtfully in a disciplined way. Take your question about white space. U.S., as an example, was primarily a wholesale market, 70% wholesale, 30% DTC. Our focus is to make it more 50-50. Make it 50-50 by growing direct-to-consumer business, right, and growing wholesale moderately, not a lot because wholesale customers over time, they're closing the underperforming stores. So we said let's control the expression. Today, U.S. is more -- it's like 55 wholesale, 45 direct-to-consumer. The direct-to-consumer business has done really well. Now if you take our direct-to-consumer presence here, it was primarily outlets, okay? Very few full-price doors. Today, we have 75 to 80 full-price doors. I mean, over the last 4 or 5 years, we added 40-odd doors. Last year, I said, okay, let's just take pause, let's not add like 10 doors a year. Let's really focus on driving profitability and productivity. And I won't give you the numbers, but the way I think of profitability and productivity in DTC is higher revenue per square foot. And the volumes -- and I look at volume in a store on an annual basis. And it's grown very, very nicely as we've introduced new assortments and made more of a balance between men's and women's. And profitability is skyrocketed. And so now we're going to go back and open more stores. We have about 75, 80 stores. We think we can double that in the U.S. I mean there are lots of cities. I mean, take Boston, for example, we have one store. We had 0 store until 2 years ago, right? And so New York is a good example where we have stores in SoHo and Times Square, which is a flagship, 34th Street, but we can -- we have one in Hudson Yards, et cetera. We can have a few more doors here. Average size, 3,000 to 4,000 doors. There are places where we are realizing if you take the 3,000 to 4,000 square feet door and add a couple of thousand square feet, it actually makes a difference. India is a good example. We just opened a larger small store in India, 10,000 square feet. I was very nervous to it's first launch. Will they -- will this work? But it's working because they've been able to assort men and women at a 50-50 mix, tops and bottoms. And the thing that we're looking at doing, you'll see it more, I think, in around spring here. We're also looking at the portfolio and saying, can we premiumize our product? And so we're introducing very soon something called Blue Tab's basically inspired by Made in Japan. You take Asia, 30% of the Asia denim market is premium. We never played in that category, okay? We had some Made in Japan product, but we didn't have a wide assortment. There's nothing for her. So we just introduced the Blue Tab. It's launched in Asia. I was just there in Asia in Singapore a couple of weeks ago, it's taken off. and that's coming to the U.S. and a couple of hundred bucks, and we'll launch it in DTC, maybe very few premium wholesale customers. And if it works well, then we can expand it. So we're looking at different layers of growth in different categories around the world.

Okay. So because you mentioned the U.S. I think you [indiscernible] 75, 80 stores, I think you said -- can you just talk about the store opportunity globally.

Yes. The thing I would say, and I say this humbly, but there are very few retailers that have what I call a trifecta effect, which is growing comp sales, and we have had we don't give the number, but we have positive comp sales now for 11 consecutive quarters. Adding doors. Last year, we opened 100 net doors. And the year prior to that, we opened a little over that. This year, we have guided 50 to 60 net doors, and I'll come to that in a minute as well as growing e-commerce in the high teens, right? So we've been doing this for a while, the trifecta effect, and I believe we can do it for a while. To your question of number of doors because under my growth remit, I responsible for retail fleet expansion, but I'm also responsible for franchisee expansion. So if you take our total number of doors around the world, we have 30 -- a little under 3,500 doors at the end of last year, okay? 2,000 or so are franchise. The rest is coming 1,200, 1,300 company. And it's very important, at least for us and for me, is to grow our franchise doors, largely because franchisees, if they're opening doors, it's their money, okay? And that means the brand is working well. And last year, of the 100, I think 40 were franchise doors. I mean it will -- for a year or 2, it had stalled, we got it back to growth. And so growing that is critical. So to your question, I think we can do 50 to 60 doors for the next 5 years, and that's another 250 doors. It has some franchise doors. It has some company doors. U.S. will be a piece of that. Asia is the other piece. I think if you take the last 5 years, we've probably grown -- added 150, 160 doors in Asia. The reason the 100 has come down to 50, 60 is we have slowed down net doors in China. China is, I would say, is going to be slow this year. We have slowed it down for obvious reasons. And as we consider exiting Dockers, we have shut the Dockers new doors. So that's why the 56 is more what I call the organic -- going back to the organic net revenue very similar.

Got it. So just to tie one of the points we were talking about before to the stores, I mean, how much how critical does it get to lead times from 16 months to 12 months to be able to turn the inventory in the store fast enough to be able to have the newness and the freshness frequent enough to bring her back often enough together and give the reason to come back often to drive that consistent traffic in the repeat purchase and the brand loyalty, which also maybe get some other purchases.

No, it's very important. Our inventory turns, huge opportunity. In '19, our inventory turns were over 3.5 turns, okay? Last year, it was 2, right? Obviously, Red Sea disruptions, and there's a whole bunch of factors. And so we have a work stream, again, under the transformation remit, we have a work stream that's working on inventory turns. And as we become more of a DTC business, how can we turn faster in our stores. So a big piece of the puzzle is we have a lot of SKUs that are not turning as fast, not as productive. And as we're introducing new products, we're working on eliminating the unproductive SKUs. That will improve turns as an example, right? And so I have a whole -- a little bit of the different bars saying, okay, we are at 2, how do we get to 3. The 1-day unlock is a couple of hundred million in working capital. And that is important because then we can use that for other pieces. But it's a real focus. And I won't give you the date when we get to 3, but it's clearly something we're working on. And there are various ways to do it, but we're thinking through. I think this whole distribution remap that we're doing, where we're going to a hybrid structure, third party as well as us will also make a difference because you're servicing your stores faster. Our distribution centers were largely built for a wholesale business. Now we are more DTC. It's a totally different way of doing things. And so we had a choice. We could do it ourselves, okay, and spend all that capital, how much it costs to build a DTC or leverage some of the experts who do this for a living like GXO and Maersk, and we chose to build this hybrid structure and think through this a little differently.

I mean it's exciting because it seems like there's so many -- flywheel is an overused expression at this point, but obviously, you got this iconic brand and you got investments consistently behind the brand. And you've had this -- you're going through this transformation to capitalize on this just brand love that's global and take it from a jeans business to a lifestyle brand. And now you've got the channels to be able to do it. You got the strategy to do it. You're building the infrastructure, you're going to -- now you get the lead times down, get the turns down. And you're talking about getting to 5% growth organically on an annual basis. And it's like you can see how all the pieces are fitting together. I mean the strategy seems very logical and coherent. It's just a matter of like flipping the switch where everything now starts to crank and you can see how the flywheel will start to turn. I mean is that -- you're smiling, I mean...

Yes. No, I think -- I mean, there are 2 ways to look at it. Some folks would say, "Oh my God, there's a lot going on, okay? And I grant you there's a lot going on. But that's what's exciting. That's what's energizing. That's what -- that's why I'm there for the last 12 years, and we'll be there for many more. But I think just proper governance with the Board, with the -- having the right people, and that's why some leadership changes, having the right structure and a consumer that is granting us a license to become more lifestyle. I think those are the things that will make a difference. And we are doing it thoughtfully. And we're not saying we're going from 3% growth to 10% tomorrow, right? We are doing it in a thoughtful way. Our gross margins is a great indication of the brand are growing nicely. And then EBIT margins, we've got a plan. So I think doing it -- and we're narrowing our focus because you can't do everything.

Yes. All right. So I want to ask about Beyond Yoga on the last because I don't want to short change Beyond Yoga because there is an interesting story here, and there's some real growth potential real dollars that we're talking about. So maybe just give us an idea of high level where -- obviously, we know where Beyond Yoga is today, but what do you think you can get to? And give us kind of a couple of ideas of the key drivers to get there.

So when we underwrote Beyond Yoga because I was part of the team that actually bought Beyond Yoga in late '21, and we did it ourselves, organic purchase through a little M&A team that I run. The proposal or the hypothesis was here's a brand that's sub-100. Here's a brand that is -- where the mix was 50% e-commerce, 50% premium wholesale. So think REI, think Nordstrom, right? And e-commerce, largely using Shopify, but -- and primarily a women's product, okay? The women's line could be expanded. They didn't have maternity. They didn't have fleece, -- they didn't have outerwear, all of which we have just recently introduced. There was no men's. And as you can see, some of the -- and men have really converted to the Activewear faster than everybody thought. And so that's an opportunity. We just introduced less than 10% of our business. There were no stores, and there was no international, okay? So we said, okay, this business that sub-100 can grow low double digit, mid-teens and get to $1 billion over time, okay? Plus it's in a category that's growing. And the first thing is could leave us play in that category. And for a lot of reasons, we said, no, it will distract us. And so let's think of doing something differently. And I call everybody. There were 14 different players, big, small, everybody was called. And Beyond Yoga is -- with a company, similar culture around the corner and a risk that was not huge because we haven't done acquisitions. So we said, okay, let's do it. The brand is now over $100 million after the last couple of years. We have just got a new management team. Nancy Green actually ran Athleta and grew Athleta and the team she's brought is largely Gap Athleta, People who run big brands and are here for the right. Their compensation is also linked to the value beyond your creates for the company. And so we -- like private equity, we just linked it that way. And so our first step is to grow the business that's a little over $100 million to close to double it, get to $500 million and then build it to $1 billion. We're not going international right now. We just -- we got 5 stores, we are going to open 4 or 5. This year, we're opening stores in the East Coast, Connecticut. I've just -- we signed a couple of deals there, maybe one in Boston, and we'll come to New York and test out the East Coast. And if that works, then we'll expand in the country and then take it overseas. We're also expanding our men's line. And so that's how we're thinking about it.

Got it. All right. I do want to ask you one last one about capital allocation and the priorities for cash flow in 2025. And specifically also, can you just touch on what your -- if your priorities might change if rates come down?

Yes. The -- as we think about our leverage and debt, we're in a good spot, okay? $1 billion, 2 notes, coupon 4%. So we're in a good spot from that perspective. The company is generating decent cash. So we don't need to raise more debt. The way we think of capital is spending 3.5% to 4% of revenue and capital primarily to grow the company. 2/3 of it is new stores, e-commerce growth, et cetera, et cetera, some investment in AI, et cetera. We're a dividend-paying company. We normally increase dividends in line with net income. That normally happens in the second half of the year. Our dividend yield is nice at about 3%. So that's good. The way we think of cash return to shareholders is a cash payout ratio of 55% to 65% of free cash flow. So that's how we're thinking about it. I've been asked about what happens when you exit Dockers and you have proceeds. And so we explore different options. Should we pay down more debt? Should we use cash to grow the company, both of which were -- we don't need to do that. We can do it without the extra cash. So it's really going to come back to returning capital back to the shareholders. and we're thinking through options. But I don't want to jump the gun, let us get the sale done, and then we'll come back and talk about proceeds.

Okay. Well, you know what, I think we got to about the end of the time here. Thank you so much. Obviously, always now I get to spend time, we can talk to you. Thank you for all the time.

Thanks a lot. Thank you.