Levi Strauss & Co. ($LEVI)

All right. Welcome to the Global Consumer and Retail Conference. Please welcome Levi Strauss and Paul, over to you.

Thank you. It's Paul Lejuez, Citigroup. Thanks, everybody, for joining. And with me, CFO of Levi, Harmit Singh. I really appreciate you being here. I know that you might want to start with just some quick opening remarks, just to make sure we get that out of the way, and then I'll dive into some questions.

Paul, thanks for having us. Yes, my opening remarks were largely -- given the fact that we are in a quiet period, we're closing our first quarter of '26. I'm not going to get into current trends, latest financial outlook. In my remarks, I'm essentially going to reflect what we talked about in Q4 '25 in the results late in January, we will be reporting results early April. But overall, we had a very strong year in '25. We're entering '26 with momentum. Our guidance reflects it. The company is transforming into more of a denim lifestyle company. And I'd say our past was denim bottoms. Our future is more denim lifestyle. I'm happy to talk about the new, what I call a very different addressable market going forward. Overall strategies are working. Our strategy is all about first, being brand-led, Super Bowl was a good example of brand demonstrated the strength and momentum being DTC first. Our DTC margins are growing, our DTC business is growing and last but not the least, what we call powering the portfolio, which is all about growing international as well as really focused on 2 main brands, Levi's and Beyond Yoga. And with that, I'd love to open it up for questions.

Great. Great way to kick it off. I think we'll definitely touch on each of those topics. Maybe we'll start with some of the strategic changes that have happened. You've had a lot of strategic initiatives over the years. You referenced momentum in the business. Which of these strategic initiatives do you think has really been kind of like the key drivers of the momentum and what's going to keep it going as we look out to 2026?

Sure. So I think if you go back, the fact that we narrowed our focus and exited low-margin low-growth businesses was a big unlock. I mean we just announced the complete exit of Dockers. We have exited Denizen. We exited a smaller footwear business and really focused on accelerating Levi's and making this transformation of denim lifestyle in Levi's. So I think that's number one. Number 2 has been the dramatic improvement in our product pipeline. We clearly are leading trends. The denim category is accelerating both in the U.S. and outside the U.S. And this pivot to denim lifestyle has allowed us to grow our addressable market and putting on my growth officer hat which I think should be the future of every CFO in the world because I think it really enables the CFO to really focus on profitable growth. What that has really done is a couple of things. If you take '25, the 7% growth, 1/3 of the growth was the newer addressable market. So things like getting into denim bottoms for him, skirts and dresses for her. I'm wearing the Blue Tab, which is 10% of the denim category, which we haven't played in. I think our market share in the premium denim category is 0.4%, and it's a huge category as well as what I call waist up, which is the shirt I'm wearing and our outerwear and sweaters we made a big push for. I think those are the opportunities that drive growth. I think what really helped accelerate growth last year in '25 was what I call the power of the magic of the and. We grew DTC and we grew wholesale. We grew U.S., we grew international. We grew tops, we grew bottoms, and we grew women's and men's. And there's no reason why that cannot sustain well into the future is not new areas that we're playing in. It's just that we are really narrowing the focus and growing that. And Beyond Yoga we can talk about. Beyond Yoga was up in the mid-teens. We are in the early innings there. The category is growing high single digit, but our product is unique. We're differentiated. We only have 14 stores in the U.S. We are not present internationally. We just launched a men's assortment and men's have really gravitated to the performance tech. So I think there's a lot more there. But the most important piece of it is it's not necessarily only growing the top line. As you said in the video recorded for our leaders, we just had a leadership summit, it is about growing the top line as well as growing the bottom line. And I think our opportunity to drive higher flow-through or convert a larger percentage of revenue into profitability, and that's really the focus of that will accelerate our operating margins.

Can we talk a little bit more about Blue Tab sort of what you've seen so far this high-end denim collection that you've introduced, how's it doing and what's the opportunity in that product longer term?

Sure. So Blue Tab was inspired by our focus on made in Japan, I mean made in Japan denim it used to do really well in Asia. It was sold in a couple of Asian countries, sold in China and it was largely men's bottoms product. Given that we were not present in the premium denim category because it's something that we've taken our eye off the ball maybe a couple of decades ago. Our merchants and product designs got together and said, it's a category that's growing. Levi's as a market leader, has a clear opportunity to play. And so they introduced what I call more head-to-toe both for him and her. And so what I'm wearing today, the blazer and the denim bottom is the Blue Tab product. Last year, we decided we're going to make this global tested in, I think, 14 mainland stores in the U.S. We never had mainland stores in the U.S. It's largely an outlet business to about 5 years ago and a few stores in Europe, along with Asia did really well. And so we think it's a clear opportunity for us. It's a large category growing well. It's what we call affordable luxury, right? And the consumer has responded really well. And so this year, we're introducing broader assortment, we're going to expand it to more doors, maybe select premium wholesale customers. And then I think in '27, we'll have a full rollout. So that's how we're thinking about it. The price points are about 2.5 -- 2 to 2.5x Red Tab. So instead of $100 and $120 product, you get more like a $220, $250 in Europe is slightly more higher given just the premium nature of our business there and it elevates the brand. And so that's how we're thinking about it right now, and it's clearly expansion of TAM. And so we just had -- as I said, we call our 250 leaders together and a big piece of what Michelle and I had talked about and the product people talked about was there's a long runway for growth for the brand, getting into areas like premium denim are important and then expansion of the addressable market in areas like tops, et cetera.

And how does that product skew male versus female?

I think it's more balanced today. It's -- I mean, we didn't have a women's product. Today, it is men's and women's is head to toe and you see it in our key stores and is working well. And it's going to get tighter. The only other piece in what we call affordable luxury segment is our collaborations. We've had successful collaborations with brands like Barbour with Sacai, along with the Super Bowl we actually launched the collaboration with Air Jordan. So the Jordan shoes, Jordan jackets. And so I think -- those are the things that probably make well and we're selling out. In the past, our collaborations were really limited. So we didn't make a lot of money. We had the scarcity factor. Now we're trying to balance it so that we sell a lot more, especially with brands that are similar to ours in terms of momentum and awareness and stature.

That's great. And how do you think about the women's business in terms of long-term penetration? I think last year, you ended up almost 40% of the business was women's. How do you think that should be longer term?

Yes. So it's the -- if you think of the category, women's are growing faster than that, and it's underpenetrated for us. So about a decade ago when I joined a little over a decade ago, women's represented 20% of the business. It was probably less than $1 billion. Gross margins were in the 30s, product was not resonating. And so the team leaned in, we have doubled the women's business. It's 40% and the gross margin are higher than the men's. This business, my view, when we get to $10 billion will be double what it is today. It's growing last year. I think it grew 11%. It has been growing high single, low double. The way we're making the pivot is a broader assortment for her. Number one. Number 2 is if you think of our stores in the U.S., take a full-price stores, we are now leading women's. So in the past, when you walked into the store, you're greeted with the men's product. About 1 year, 1.5 years ago, we said, "Let's shift—75% of the shoppers are women. Why don't we start with the women's product?" the question was, would it cannibalize men? Actually, the magic of the and appeared again, it grew women's and didn't cannibalize men, which was important. And so today, 70% of our mainline stores in the U.S. lead with women's. If there are not 2 floors in the store, then you have women and men's assortment on either side as you walk into the floor. And again, at the recent summit with leaders, I was like, we have 3,000-plus stores, if you take the franchise stores and ours. And we're just getting started here. So why don't we take this to market. We have tried this selectively in stores outside the U.S. Take our flagship store in Mexico: previously, when you walked in, you were greeted with men's product. About 6 to 8 months ago, they changed that to women's, with a very similar result. And so I think that's one way of driving or accelerating the growth. To your question, my own view is that this can be at par with men's, so 50-50 over time. And that's not a bad product. That's not a bad result. It could be higher, but I think 50-50 the next base camp where this goes.

So we'll continue to see women's outperform.

Yes. I think so. Michelle is leading the charge with that solidifies our chief product and merchant is also a woman, she's driving that. So I think it's clearly making a difference.

Yes. And how do we think about women's growing faster than men's? How do we think about the other -- the drivers of sales for the company overall? And is it mid-single-digit organic growth rate sort of the right ballpark to think about? And how do we think about that in terms of channel, geography, what are the --

No, it's a good question. I mean, if you think of -- I mean take last year as an example, right? The denim category globally grew 3%, around that. We were up 7%. 1/3 of the growth was what I call expansion in our addressable market, so things I talked about, which means you back that out, we grew 5%. So we outpaced the category. Our view is we continue to outpace the category, especially if you're delivering the part of the end across all the pieces I talked about. Euromonitor's projection is that the denim category goes in the mid-single digit over the next couple of years, especially as the world casualizes. If you take premium denim, it probably grows a little faster than the normal denim category. Apparel is around the same pace. So the way we think about it is and that's where we guided for '26 is a mid-single-digit growth company. Now where is that growth going to come from geographically? I'd say the Americas, which includes the U.S. probably in the low single-digit range, Europe in the mid-single digit. Asia represents 20% of our business with half the world's population, probably grows faster, say, mid- to high single digits. So that's the geographic piece of it. I think if you think of men's and women's, women's growing faster than men's probably in the high single-digit men's in and around the category. And if you think of tops, our tops business is about a little over 20% of our business. So we -- when I joined the company, we were selling 7 bottoms to the top. I think we ended last year, 2 bottoms to a top. There are countries like India, which is one top to one bottom, which is where we'd like to go. In quarter 4, half our growth was tops because we lean into sweaters, we lean into outerwear, et cetera. So I think probably stronger growth in tops, very similar to women's, high single digit, low double digit and hopefully getting to 1:1. So that's, I think, the -- you think about the category, that's the way to kind of think about the business.

And DTC-led is that --

Yes. And if you think of channels, DTC, high single digit, wholesale globally low single digit. And our DTC business is what I call a good trifecta is not -- we're growing same-store sales, done it now for 15 consecutive calls. We don't give the number. We did say last year, it was high single digit. We're opening 50, 60 stores. And the third -- the piece of the trifecta is growing our e-commerce business, which has been growing in the mid-teens and it's very profitable today. And so our e-commerce business is about, I think, 10%, 11% of our business, it was half that. 5, 7 years ago, we'd like to get the e-commerce business to about 15%. And so those are the factors that give us confidence in driving a higher DTC business. Now there are some markets, the U.S. about a decade ago, was primarily wholesale. We didn't have full price stores. It's largely an outlet business. E-commerce is very small. I think we closed last year with DTC now representing 45% of the business. Take Japan, a decade ago, Japan was 80% wholesale, very little retail. Today, DTC is 75%, wholesale is 25%. So the -- I must say right upfront that DTC growth is not going to come as a cost of wholesale, okay? For us, wholesale is critical, it's important. Growing wholesale is an important piece of how to grow, but it will probably grow at a much lower pace than DTC.

So that's the top line. Let's maybe talk about margins. I think you've thrown out there a 15% number several times in the past. Maybe talk about your confidence getting to that number and how you build there between gross margin and SG&A?

Sure. So our operating margins in '23 were close to 9%, '24, a little over 10%. Last year, we closed in the mid-11s. This year, we're guiding close to 12%, right? So let's start with -- we'll get to close to 12%. So how do you get from 12% to 15%? As I said earlier on, I think driving growth and driving profits at the same time is critical. One of the things that we -- I talked about with our leaders 2 weeks ago was the desire to focus on flow through, which is convert a high percent of our revenue into profit dollars. We've done a nice job growing the top line. Now we have to convert into a higher flow-through to get to that. So the way I think about it is if you get from -- how do you get from 12% to 15% I think it's basically 3 elements? Gross margins have grown very nicely over the last couple of years. And our model can or should deliver 30 to 40 basis points of gross margin acceleration every year. If you just focus on women's higher gross margin, the men's DTC high gross margin in wholesale and international versus -- that is 30 to 40 basis points. I'm not building in pricing. I'm not even building in full price selling. We are making this real focus on driving higher full price selling because our product is hitting home, hitting the mark and we have an opportunity to drive more full price selling. The second piece is mid-single-digit growth company should drive leverage on the SG&A. And we think that itself is probably in the same if you think of just SG&A leverage, should get us 150 to 200 basis points in operating margins. The other piece in this is we can talk distribution and network in a minute, but our distribution costs are a little over where we think there's 100 basis points of opportunity as you make this more omnichannel inventory efficiency fulfill in that 150 to 200 basis points. And if the model allows us, we can probably take our advertising expense, which runs at about 7% of revenue, up by 50 basis points. So that's our rail building block. Grow gross margin, drive SG&A leverage, and if the model allows us to spend a little bit more on advertising.

Got it. And maybe can we talk a little bit about the distribution centers that's going to certainly a little bit of a drag on the P&L as you kind of remapped the network. When do you expect that to be fully rolled out? When do you expect a full benefit? Just maybe what issues have come out relative to kind of what you thought at the beginning.

Yes. So as we talked about -- so taking a $6 billion company to close to $10 billion with DTC being more like 55% of the business and we looked at what is the infrastructure needs in the company. One was just have an ERP, which is prime for a DTC business and most retailers have moved to the new SAP. And so we are probably 60% of the journey there and so far has gone really well because it's a big data unlock, right? And so that's one piece. The other piece was our distribution network, which required more units to be processed was not an omnichannel network. I mean in the U.S., for example, we had 4 DCs, 2 of them were 30 years old. They're largely manual, and so they needed an upgrade. And so the way to upgrade them was either you shut them down and like a remodel, just upgrade them or we thought the better option was to go with a third party who does this for a living. We run 2, they run the third. And so we signed up with Maersk. And so that's the process we're going through. It's more automated is get to omni-channel. That's taken a little longer than we would have liked. And that's why we've had to -- we've shut 1 DC, we had to keep the other open. Our thinking is the ramp-up stabilizes sometime by the end of the first half and sometime in the second half, we shut the second DC. So that's one piece of it. When it gets to complete when the transition is complete, we are able to drive higher throughput at a lower cost, et cetera, et cetera. We did something similar in Europe. In Europe, we built a DC because we're getting ready for capacity. And then GXO which is the Maersk equivalent in Europe said, "Hey, why don't we operate it? They cut us a check for the amount we spend." And it took us about I would say 6 to 12 months to get that ramped up. And you've seen the European results in quarter 4 is actually a lot better now. My own view and the only example I give is we have a distribution center in the U.K. that was really servicing wholesale and stores, not servicing e-commerce, e-commerce with a third party. We brought it in-house, I think, in the end of first half of last year and it has made a big difference. Costs are lower, we are fulfilling faster with better inventory efficiency and the U.K. business has done really well. So I think as long -- there is a bit of a transition pain right now in the U.S. in particular. But once it gets done, I think the payback is there for the making. To the question or when do you get from 7% low 7% to 6%. I think that takes a little time because it's just the efficiency, and that's why it's built into our 12% to 15% plan. But we're getting ready for a big company more. And the -- if you think of our revenue growth last year, of 7%. I would think 60% of that was really driven by more units. So it's not entirely an AUR player. I'm a big believer you must be selling -- we must sell more while we drive higher AURs. Our plan for this year in the mid-single digit is more balanced, 50-50. So selling more units is important. That's how you grow market share. That's why we get penetrated things like tops which have opportunity, et cetera. So -- and the denim lifestyle and the focus on the growing the addressable market will only happen to sell more units.

Got it. Can you talk about the price actions that you took here actually as a result, I think it was driven by tariffs, right? And now what do you do from here just given the until we could dig into the tariff type. So we didn't price.

For tariffs, I would say, probably 1/3 of the tariff impact. And that impact was in '26, about 150 basis points on gross margin, which if you do the numbers in dollars, is close to $100 million. And so our pricing in '26, unlike pricing that we did during the inflation was we were not the first to price. We wanted to see how the market and the consumer response. We are more thoughtful on entry-level pricing because we have so much innovation, we lean in a little bit more and took a little bit more pricing on the new stuff. And the pricing has been effectuated largely in Q1. So far, the consumer has been resilient. We have momentum. We have new products. The consumer generally seems to be in a good spot. And so as we think about the year now with everything happening on tariffs, we're just waiting and seeing how this unfolds. But our view is that we continue to give a great price value to the consumer. We're still selling more units than we were. And so that means there is demand for the product. And so that's how we're thinking through it. We've taken a little bit of pricing in Asia and Latin America, we naturally do that to offset inflation, very little pricing in Europe, where we're leaning in, in Europe is more selling higher full price selling because the product resonates, the brand is really strong. And so that's how we're trying to get higher AURs from our European business.

Got it. And can you quantify the potential benefit on tariffs? Like do you just look at kind of like last year and what was the drag just assume that?

So the -- I think we'll give more clarity when we report Q1 in April. Hopefully, there's more clarity on tariffs. But the way to think about it, our guidance on tariffs, our guidance in '26 assumed incremental tariffs of about 20%. The administration right now is about 15%. So there is a clear benefit, assuming that stays at 15%, there's a clear benefit. And so we're in the process of quantifying and summarizing a scenario planning that piece. So more to come. And then the question is if there is an incremental benefit, what do you do with that, right? Do you roll back pricing? If the consumer is responding well, that's something we will evaluate or you drop that into profitability. So we're working through a couple of scenarios there. We're also mindful of the potential of refunds, right? Every day is a new day on that. The international court, I think, rule that refunds have to be provided back to the companies, I think, late last week, administration and responding. The worst case scenario is we won't get refunds, the best case is refund and then what do we do with that? It's largely a onetime benefit if tariffs stay going forward, then you can use the cash to either return back to the shareholders or something different.

When you say do something different? Would that be within operationally? Would you maybe increase marketing?

Yes. I mean the good news for us, our guidance for '26 assumes approximately a 4% capital spend, right? This is opening doors, depending on technology and AI. So I don't think we need to spend more on capital. Should we exert some more store openings? Maybe. But again, it's not something that is critical. The -- in terms of spend back -- maybe a little bit more marketing, I don't know. I mean at the end of the day, we are committed to what we guided. We're committed to growing operating margins as we grow revenue. And so time will tell what do you do with that money. We've done a fairly good job, and we sold Dockers and we returned all of the proceeds back to shareholders in the form of higher share repurchases. So we're committed to making sure that if there's excess cash, we manage that through discipline, either investments or return that back to our shareholders to the extent we can.

Yes. You mentioned the sale of Dockers, had moved on Denizen as well from -- moved on from that. you also just recently referenced coming out of a food retailer, a grocery retailer. Maybe can you talk about that. Who was that? And is there anything else that you're thinking about in terms of exiting some wholesale partnerships?

We don't name customers, and it's not on a few, you can count them in your fingertips. But basically, as we elevate the brand, the areas we're looking at call pruning or rationalizing largely places where the brand is sold at a much discounted price point. I mean, off-price is a clear example. We don't make for our price. It's largely used to flash product. When things were not great for the brand years ago, we are selling at cloud, we were selling at grocery outlets, et cetera. So using this opportunity to kind of rationalize it. I think the -- it's about 2% of growth on our U.S. wholesale business which represents over 25% of our total business, about 0.5 point of growth. But we're still growing the company. U.S. is still going to grow. And so we're being prudent about it. And because we have other opportunities to grow wholesale, we are underpenetrated in women's. We're underpenetrated in tops, beyond what a direct-to-consumer businesses. So we think -- and then we have talked about expanding distribution with a couple of customers in the U.S. And so we're working through we have different strategy for different customers where we say, okay, can we get more floor space, can we expand and demonstrate more of a denim head to toe look. So take Macy's in Herald Square, they've expanded the footprint for men's over 4,500 square feet. They have expanded the footprint for women's again, 4,500 square feet, giving more of a denim lifestyle look. And so with key customers, we are in conversations about now that we have the product we have a new strategy and lifestyle. Is there a way to bring that and execute that. So the consumer or customer sees it when they walk into a store. So we're working through some of the strategies with different customers. And so as we do this, there's their customers who we can rationalize or get out of those are the things we're looking at. But there's not a multi-year activity is just a year or 2, and it will continue to drive growth, it will continually with the brand, and I think that's what we are focused on.

You guys created a lot of buzz with the Beyoncé partnership in a slightly different direction, I think that partnership is over. Is there a chance that you could revisit that at some point? Should -- is it on your radar screen that you have to anniversary that in this upcoming year? Is that going to be a challenge?

Yes. So Beyoncé was great. It started with her wanting to name a song Levi's and we got this call. And we said, yes, we'll be more than happy for you to go forward. That led to the thinking of, okay, can this be a bigger partnership because she's someone who's been in the center of culture and has been a fan of the brand for years, and we have been a fan of hers for years. And so that led to the partnership. It also -- the strategy was would this continue to allow us to grow our women's business faster and connect with the youth. And so that's what happened. And it took the women's business to another level. Then the question was, how do you continue with that momentum. It's less about lapping, but how do you continue the momentum. And so if say, last year was where we played strongly on music, this year's music and sports. The Super Bowl campaign was the beginning of something that built on the momentum we have with Beyoncé. And now we've got the World Cup with the Levi's Stadium, a few games are being played there. So we kind of leverage that. And so it's less about lapping it. It's about just going from strength to strength. We'll always -- we play best when we're in the center of culture, which is about music, sports, art. And so that's where around the world, in most of the art festivals, music festivals, we play a big role. It's Coachella here. It's a couple of festivals in Europe, et cetera. And so the way we are thinking about it is that we've got a strong campaign. We've got strong influencers. The other thing we've changed is -- so if you think of our Super Bowl, the campaign that was launched at Super Bowl, it had influencers from around the world. It was not only U.S. influencers, we have influencers around the world. And that's because we are a global company, that makes a big difference. It's also locally relevant depending on which part of the world you are. And that's really how we're thinking about it. And the ROI is pretty good. I mean, I look at that. And it's a good discussion I have with my CMO. And that's why we're maintaining the spend at 7%. We're not increasing the spend. But as you grow revenue, it means incremental advertising dollars and means incremental advertising dollars means you can spend on advertising and take it to the next level.

Sounds great. Beyond Yoga, big growth there last quarter. Maybe you can talk about the drivers of that growth, what you built into this year.

Sure. So Beyond Yoga, yes, it was up 40% in quarter 4. I think it closed the year in the mid-teens, in terms of growth rate. We -- so the drivers of the growth in quarter 4 were a couple of things. We have a new team in place, largely folks who work for Athleta and took that brand from a couple of hundred million to over $1 billion. So they know the business, experienced folks, Nancy, who runs the business ran Athleta. We've also brought in retail leaders. We brought in a wholesale leader, et cetera. So we built the team. And Q4 was the first real execution of that team in terms of product, in terms of branding and we also opened a couple of stores. So the assortment is broader than pure women's, that's a business we bought, is now we've got is more than leggings. It's more lifestyle. We've got fleece, we've got outerwear with a performance angle to it. We've got a men's assortment today that's doing really well. We have more stores. So it's a combination of those factors. Our view is that business probably grows in the mid-teens in '26, which is faster than the category and the category growing probably mid- to high single digit. And then at some stage, when the model is proven, we will take this international. If you ask, we had all the leaders in, 40% of them were international. They were clamoring for getting Beyond Yoga to the market. And we said, no. Let us first prove it out. We're not making money yet in Beyond Yoga. I want to it probably gets close to breakeven this year, maybe early next year. And then we'll decide to take this international. So we're thinking through that, but we're doing it in a very disciplined way.

Excellent. Maybe just one more as we're coming up on top oil prices up a ton. What's going on in your mind? What does it mean for your business? How do you handle it?

Yes. We are watching it as well because it's evolving by the minute. If you think of oil and the impact to our business, product costs, cotton -- I was looking at the cotton futures earlier this morning, they're largely where they are. We have locked in product costs for the year. So there's no immediate impact on that. The other piece is the impact on the consumer, right? It's early days. And so we're going to be watching that space. But we have the product momentum. We have the execution momentum. So we'll be able to withstand that. And then the impact on currencies. I mean those are the 3 things. Aida and I went back and quickly looked at what happened when Russia and the Ukraine war started and oil again went through the roof. It had it had a minor impact on our business. And so while we're watching the space, we're -- right now, we're being -- I think we'll be fine. We're also watching the sourcing because if Strait of Hormuz is kind of closed, and so the teams are working through different scenarios. We'll talk more about that when we report Q1 earnings. But given that we have a sourcing base that's spread through the world, I think we'll be able to leverage that if things tighten in one part of the world, et cetera. So I think a diversified sourcing base, product costs largely already locked in, consumer in a good spot so far. I think, will help us probably face this latest headwind in a better way than most others.

That makes sense. Harmit Singh. Thank you.

Thank you, Paul. I appreciate it.

Thanks, everybody, for joining. .