Levi Strauss & Co. ($LEVI)

Great. Well, welcome, everyone. Good afternoon. I'm Jay Sole, UBS' retailing department stores and specialty softlines analyst. And welcome -- I'm sure you've been welcomed already, but I'll just welcome you again to the UBS 2026 Global Consumer Retail Conference. We are honored to have Levi's here with us today. Representing the company is Harmit Singh, Chief Financial and Growth Officer. Also Aida Orphan is here. She's Vice President of Investor Relations. And I think Harmit and I just going to have a little conversation, and we'll have a lot of questions to get to. So we'll just get started.

And I guess the first one is we're going to talk about 2 different ways. First, you have 2 different hats. You have your Chief Growth Officer hat, but also your Chief Financial Officer, hat. And I think that the first thing I want to talk about is just in your role as Growth Officer, what do you expect will be the most important drivers of momentum as you look ahead to [ 2026 ]?

Sure. Well, good afternoon, everybody. Thanks for joining our [ Ying Yang ] session. But let me just start because we're in the process of closing quarter 1. So we're in a bit of a quiet period right now. So my remarks are not going to talk about updating trends or guidance, et cetera. I'll reflect what we really talked about when we reported earnings a couple of months ago and the guidance for the year. To your question, yes, in a 1 ways, 2 hats. I hope that's a trend for CFOs going forward because I think CFO should embrace growth and a lot of CFOs do. But just a bit of history, we had a great '25. We have guided a strong '26. If you go back the last few years, our strategies of being brand-led, DTC first and powering the portfolio, clearly working. And just a bit of stat, our growth has accelerated. We closed last year at 7%. The organic growth, the year before is 4%, the year before that is flat. We've clearly grown market share. I'm happy to talk about it, and positioning ourselves solidly at a mid-single-digit growth company. The second is, while we're growing the top line, we're also accelerating the operating margins. Operating margins, '23, over 9%, '24, a little over 10% and '25, a little over 11%, and we're guiding '26 as closer to 12%. So as you think about this pivot from a company that had its foundation in denim to a company that has its future in denim lifestyle. We have been able to expand our addressable market, which I can talk about. Addressable market in the past was probably the denim category, $100 billion. The addressable market going forward is 15x that. I'm happy to share that in a minute. But more importantly, our future is about taking the $6 billion company, making it $10 billion and taking a company that generates operating margins of, I think, '26 we're saying high 11%, close to 12%, and getting to 15%. We have building blocks that clearly articulate this. To your question about what drives growth in the growth offices role, I think a couple of things. We spent the last 2 years really narrowing the focus, exited Denizen, just closed the deal on Dockers, exited a low of footwear business. So really focused on, okay, here's how we grow Levi's and we're accelerating growth in Beyond Yoga, really 2 pieces. The other thing is a lot of companies have different ways to grow. '25 is the best example of what I call the power of the high end, which is we grew every facet of the business. We grew DTC, we grew wholesale. We grew U.S., we grew international. We grew men's, we grew women's. We grew bottoms, we grew tops. And what I really like to see is growth not only coming from higher AUR, but also coming from selling more units because that's the way you get market share, and that's what also really happened. And so I was just at the leadership, we bring our top 250 leaders together once every couple of years. And I really talked about the power of the high end, which means that you've got to grow both sides of the business because the result is really magical. We are able to grow our TAM, which I can talk to you in a minute. 1/3 of our 7% growth last year was driven by expanded TAM. Happy to get into. So that's the second piece of it. So first, narrowing the focus, really focused on a higher addressable market and growing every facet of the business. And if you do this, the 5% mid-single-digit growth is here to stay for a long, long time. So that's really taking a hard look at where the growth comes from and ensuring you can drive growth, but doing it with a financial lens, which is it has to be profitable. It just can't be growth for the sake of growth. That's why the areas that we are growing faster, whether it's women's, whether it's direct-to-consumer, whether it is international, are all accretive to gross margins. And that's important. And as we make this pivot to a DTC-first company, I think DTC, we closed last year at 50%. We are aspiring for the DTC business to get to closer to 55%, DTC EBIT margins are lower than wholesale EBIT margins, but we have been successful in growing DTC EBIT margin. Last year, we were up 300 basis points. And so making sure we narrow the gap really drives the operating leverage, that's really what we're focused on.

Okay. So I definitely want to circle back to margins at some point, but I want to just make sure we pick up this thread of the total addressable market and how it's increasing as you pivot more into lifestyle. I think you mentioned 1/3 of the growth last year came from TAM expansion. I guess how much larger is the opportunity longer term? And maybe if you can also touch on the launch of Blue Tab, your high-end denim collection, how is that doing? And what's the opportunity there?

Sure. So I'm going to BlueTab denim's bottom the BlueTab blazer. But...

You got cool [indiscernible] that too.

And the collaboration with Air Jordan, which we launched as we launched the Super Bowl ad. But basically, the denim category is about $100 billion. It's growing around mid-single-digit range. 10% of the denim category is what we call premium denim, what we are internally calling affordable luxury. We've not played in it. And so about a year ago, we launched the Blue Tab. Prior to this, it was largely a made in Japan product, sold in Asia, largely men's bottom. Blue Tab is now taking the -- is inspired by Japanese denim selvedge denim, but it's more. It's more a head-to-toe look, both for him and her, and it's growing very nicely. Last year, we tested it in a few doors. This year, we are scaling the test, and we really scale the business [ to ] '27. That's how we're thinking about it. But it's a big piece of the denim category that we don't play in. So that's one, I would say, organic expansion of TAM. The other thing that we are doing is most of you are dressing a lot more casually as you go to work, but you're not dressing in jeans every day. So we're really making this pivot, especially after the exit of Dockers to drive more non-denim men's bottoms. We introduced performance [ stack ] with growing our chinos business in the U.S., Levi already sells more chinos and performance segment Dockers ever did, right, as an example. We're just getting started. So that's one area. The second is we've introduced denim skirts and dresses for her, which we never had. Again, denim is aesthetic, but something that we never played in. I talked about the Blue tab. The other piece is, if you think of waste up, we've really focused on growing our tops business. Our tops business in quarter 4 was about half our growth, grew about 7% a year ago. It's still only 20% of our business. And we make this pivot to denim lifestyle, there's clearly an opportunity. So we leaned in on sweaters sold out. We leaned in -- I mean we didn't have quarter zip and a lot of men here wearing -- love quarter zip. I love my quarter we don't have it. We didn't have it. We will probably have it at some stage soon. As you think about shirts, you think about polos, you think about woven shirts for her, et cetera. And those are the areas we're looking at. Made a big play in outerwear in quarter 4, did really well. I guess the only thing I would say is this new TAM, which is probably $1.5 trillion, doesn't mean we're going to just do apparel for the sake of apparel. It has to be driven by a denim aesthetic. We're not going to be fashion forward. We're still going to be slow fashion because managing inventory and all that is an important piece of the pie. So that's how we're thinking about the market. And that apparel segment is growing also in the mid [indiscernible] sometimes a little higher, the performance piece is going high. So I think we've got growth and a sustainable level of growth for the next [indiscernible] especially as we make this pivot to a denim lifestyle and [indiscernible] driven business. Now what happens is we're not taking our eye off the ball on wholesale. Wholesale has to grow. But when wholesale customers see what's happening in our direct-to-consumer business, they start leaning in. Macy's, for example, in Herald Square leaned in and they've given a larger footprint for men's, a larger footprint for women's, more denim lifestyle. We had a few of our key customers come doing Super Bowl, that's all we talked about it. How do you -- how do they lean in more in women's. Women's is leading the denim category growth in the U.S. How can they lean into that? How can they lean in. So there's a lot more opportunity...

That makes sense. And I guess I want to follow up on that, ask few question. I don't think I've actually asked you this before, but what strikes me when I walk into the store is that -- and you just mentioned it, it's denim-led. If you're going to do denim shirts and things that you haven't done before, it will be denim. There are a lot of denim tops in the store. And I think that the part I haven't asked you is that it feels like a very patient way to grow a brand and gain credibility in other categories, which has to ultimately drive an even bigger lifestyle assortment, which can capture an even bigger part of the TAM. Because I think as investors, we don't want to see companies rush into other categories where maybe the consumer hasn't quite given you permission to play because that can feel inauthentic and that can turn the consumer off. But the question is, how intentional has that been? How intentional has it been to say, all right, we know we can be a lifestyle brand. We know we can be more than a U.S. wholesale men's blue jeans business. We know we can be a global omnichannel men's and women's lifestyle brand across many categories. But it takes time to get there and to bring the consumer along with [indiscernible] authentic and exciting. So just tell us about how your company has managed the brand from a standpoint. So 10 years from now, when you walk into the store, you're seeing a whole lot of different options for Levi's, the consumer says, of course, that makes total sense versus just kind of rushing into stuff maybe for the brand.

Yes. And I think that discipline when Michelle came on board a couple of years ago and Chip was around, he said, Michelle and heard me because I was looking at the corporate strategy, why don't you guys get together? And let's see how we refine the strategy. We sat as a group, got the executive team, and that was really a big aha was, okay, we are about denim. We were moving into lifestyle, but it was not about denim lifestyle. We were doing lifestyle for the sake of lifestyle. And we said, okay, no, it has to be about denim lifestyle. And if that's the case, what's the role of footwear? Probably not. We're not great at footwear. We've got other footwear brands. We can collaborate with brands like New Balance and Nike, but that's not what we want to wake up every morning. Dockers was a piece of that and said, okay, maybe not. And so it was a more disciplined approach. And the idea really was whatever we do, we want to be great at because Levi's is known for quality. It's okay to be slow. but it's great to have a strategy going forward. So I mean when I talk about Blue Tab, we just didn't get there and say, okay, we're going to want to own this and take it from whatever it is to $100 million business. We are going to step our way into it because what is also more important is we've got to convert the -- our associates who are used to selling denim bottoms. They've got to come in along -- in this journey. I have a big -- when I talk about commitment, I talk about 3 levels of commitment. The first is a political commitment. When leader says we have got to do this, people normally nod their head. Very little actually happens, right? The second is the intellectual commitment where you engage people's mind, a little more happens. But what really makes a difference is when you engage their head and mind and explain what is in it for them. And that's why when we call our 250 leaders together a couple of weeks in San Francisco, and I was on stage and Michelle was on stage and our product person was on stage, we were talking about this journey into men's lifestyle. Why is it important? How do you engage people? How do you grow market share? We talked about the new TAM, the $1.3 trillion -- that's $1 trillion is one of the things I revealed in there because we want people to feel that we can be a bigger business, and we can do it the right way while protecting the DNA of Levi's and Levi Strauss. So that's why it takes a little time. And we've got a large wholesale business. We've got a bunch of other brands. If they have to start giving us more floor space, it's going to come from somewhere. And so that takes a little time.

Makes sense. Let me follow up with one other, because you mentioned Blue Tab a couple of times. getting into Blue Tab, which is a way to get into that aspirational luxury, I think, as you called it. And it elevates the brand to be able to sell things at a higher price point. But at the same time, you talked about Denizen, you talked about some of the businesses that you [indiscernible]. And we know there's been changes in distribution, maybe getting away from some of the promotions and discounts and maybe channels where you don't feel like the future is as bright as other channels. I don't -- the company doesn't use the term quality of sale very much, and it doesn't really talk about brand elevation necessarily because other companies will use that term. But to me, clearly, Levi's has been on that journey to say, hey, we are the best brand in the world when it comes to represents that when we go different channels and different [indiscernible]. Talk about how much work is done because it feels like a lot of work has happened over the last 5 years and even now getting to the point where you can do premium denim because a lot of the work that you set yourself up to get to this point because you cut off sort of the bottom end of the distribution where maybe it was holding the brand down. Can you just talk about all the work that's gone into that? And is there still more work to do to be that -- to be what Levi's is the best version of Levi that it's been.

When we guided this year, we talked about pruning some club business, talked about pruning some grocery outlet business. When the brand was not -- didn't have its moment was not as strong, we were into -- we were selling through retailers that we feel we probably should not. And so we are trying to elevate the brand. You take Target as an example. Target was selling Denizen. That was all they were selling $30. Then we partnered with them and said, let's introduce Red Tab. We tested it. We tested it with 70 stores for men, 20 stores for women, then we expanded it to 200 stores. We went to 700 stores. When we touched 700, we had a discussion and said, maybe we don't need Denizen. It's $150 million business. We took 1.5 years and exited that. Now as you know, a week or 2 ago, we've decided to expand that to 1,000 stores because it's really elevating the Levi's brand in Target. And so it's just a bit of a journey as an example. So to your point about pruning businesses, I think we have a large off-price business. It's largely -- we don't make for off-price. We've never done that. It's largely flush. And as the inventories are healthier as the consumer is in a good spot, our products are working. We're slowly pruning that business off also because it's really allows us to elevate the brand. Soon after COVID, we probably pruned, I think, 2,500, 3,000 different doors in Europe, smaller doors, not as quality conscious as we like it, et cetera. So where we can, we did a little bit in India, I think, last year. So I think it's a constant evolution. It takes a period of time. We're not going to yank ourselves out of large customers. That's not -- some brands have done it. That's not who we are because we want to drive market share. And we have some real loyal consumers who love us. And so it just takes a little bit of time and discipline [indiscernible].

Okay. Maybe you mentioned on your last earnings call, I think 40 -- excuse me, 50 to 60 net new store openings this year. As you expand stores globally, which markets and countries are you targeting? And maybe if you can talk about the improvement in profitability, which you mentioned before in the DTC channel, what's been driving that? That would be next question.

So our model is about 50 to 60 net new system doors every year. As part of my Growth Officer role, I also look at -- look after all real estate, real estate expansion, franchise expansion, et cetera. And having spent my formative years in a franchise business, ensuring that the franchisees are able to grow is really near and dear to me because if you take out 3,300 doors that have a Levi's logo in front of them, we have about 2,000 -- 1,500 to 2,000 franchises [ or less ] we operate. And so it's important to get the entire system to grow. The 50 to 60 doors on a net basis, I would say 10 to 12 in the U.S. In the U.S., the business was largely an outlet business 10 years ago. Now we have about 80 full-price doors. So in New York, you have -- beside our Times Square door, you have a door in SoHo Street, Hudson Yard, 34th Street, et cetera. We opened about 4 last year. We scaled up about 8, 10 every year. But when we took a bit of a pause because we wanted the stores to be really profitable. We wanted -- and the other thing we did was we took our doors and said, if we really want to accelerate the women's business, we should lead with women, right? So when you walk into a door, the women assortment is right there. 70% of our doors in the U.S. now lead with women, right? And women's is 50% of the DTC business in the U.S. And we're just getting started around the world, as an example. Because these stores are now very profitable, we are scaling it up to 10, 12 a year. I think we can double that. And what it does is, it changes the business in the U.S. from primarily a wholesale business to a business that has DTC and wholesale at an equal fitting. I think we ended last year with -- in the U.S., DTC was about 45% of the business. So I think that's the transformation. Outside the U.S. are the other doors, largely in Asia. Europe is about 5, 10 doors a year. The rest are largely Asia. So that's -- and I personally believe we can be opening 50, 60 for the next 4, 5, 6 years, so really growing the system. The reason -- the way -- I think when I call -- look at the DTC business, I call it a bit of a trifecta. You grow same-store sales. We've had 15 consecutive quarters of growth on that. You open new doors, 50, 60 a year, and you grow e-commerce in the mid-teens. So that's a good trifecta. And we've been doing that successfully. To your point about DTC profitability, I think we ended last year in the high teens, and this is like fully loaded. We are loading the cost of running stores, including a bulk store in it and e-commerce, fully loaded technology for e-commerce and advertising. The wholesale margins are probably in the low 30s. And so -- and last year, DTC margins were up by 300 basis points, largely driven by 3 factors. One is higher revenue per square foot. As we -- I talked about the women's business, for example, really driving and accelerating. We're really focused on converting more. Traffic is probably flattish kind of thing, but we are growing only because we're converting more. This year, we're making a big pivot on driving more units per transaction. If it's all about lifestyle, you walk into the store, you may walk in for a denim bottom but you walk out with a top -- a denim-inspired top and a bottom. So we're really making this pivot to drive more UPT. So that's one piece of it. The second is gross margin on direct-to-consumer business are pretty good. We're also narrowing promotions. I mean one of the things we realize is if our products are resonating, there's no reason we shouldn't be selling more at full price. So we're taking a hard look at our promotions. We're reducing the cadence. We're reducing the window of promotions and we're driving more full price selling. I think that's an opportunity that will be here for a while. And the third is just getting better at managing costs, labor productivity tools, et cetera. We didn't grow up as retailers, DTC retailers. We grew up as wholesalers. So we've got talent. Our commercial officer spent 30 years in retail. He joined about 2 years ago. He's brought a few people who've done this for a long, long time. And so we're really investing in tools that make this and improve the margins and productivity over time.

Makes sense. I think just from my perspective, talking to a lot of investors, a few years ago, the question was, over the next -- we just talk about the next-gen stores and rolling them out, and it's a new format, it's going to work. I mean that was something that was an open question, how successful can Levi's really be with their own store format. And that's -- I mean, just to talking about the margins and success and all the productivity that you've had, I mean it's not even -- I think that people have sort of not really realized that Levi's has unlocked this opportunity. And to your point, you can see 50 to 60 doors per year for quite a few years going forward. I don't know if that unlock is truly appreciated because now you're just like, okay, we figured this out. We know how to do this, and we're doing it. It's been very successful. Now we're rolling it out. It's a much different story than a couple of years ago when people are like, it's really going to work. Levi's is kind of [ a whole company ]. And now you're here. So to me and from what I've understood is that before when you have -- in your mind, you always assess the probability of how successful something [indiscernible] be based on the evidence that you have. I mean the probability of this DTC operation being way bigger and taking advantage of this huge TAM that you're talking about is so much higher. Just given what you've proven over the last few years, I don't know if -- sometimes I feel like that's lost on people.

Yes. No, I think you're right. I think there are a couple of myths, if I could bust, I'd like to bust. One is we're more than just wholesale. We've had wholesale now grow for a while, but we're more than just wholesale and more than just U.S. wholesale. That's one. And second is DTC is here to stay successful. So for example, when we were ramping up new doors, one of the things we did earlier on, and this was in discussion with the Board was 2 things. One, ROIC became a metric in the long-term compensation of leaders in the company, okay? We had to make people -- educate people what ROIC really stood for, but every store has an ROIC. We have a threshold. The other thing, and I learned this during my retail days at Yum! is, you have to measure the returns on stores. And so we've got a concept called hit rate, which is, again, something I did at Yum! years ago, which is what -- how many stores actually hit the revenue and profit threshold. And we review that with our finance committee of the Board every year and with the executive team. And our hit rates have never been better. okay? I'm not going to get into what it is, but it's pretty damn good. And so -- and it's all about learning. It's a autopsy without blame and saying, okay, here are the stores that didn't work, here's why it didn't work. Let's learn and get on with it. So I think it's a journey. It takes a little time, but we're pretty pleased with the progress that has been made. So over time, people will -- I think the question we get a lot of time is give us your same-store sales number, right? Give us your comp sales. And we have this debate internally. And -- but we have talked about the fact it's positive. At some stage, maybe we have the courage to give a number. The thing about a number is once you give a number, then you have to give it every time. But the fact I would say is direct-to-consumer business has been growing high single digit, low double digit for years. And so -- and it's 50% of the business, and we think it can continue to grow.

Okay. I want to ask a couple of things. I know you mentioned you're getting a lot of questions. I know a lot of questions about price increases last year. First of all, just remind us what kind of price increases you did take in the U.S. to offset tariffs? And then when do those prices -- those price increases kick in? And then how much tariff impact is embedded in the guide for the fiscal FY '26, the current fiscal year that we're in for the gross margin [ guidance ]?

So it's -- as you know, it's changing on a regular basis. Our guide assumed an incremental 20% of tariffs for '26. Pre-liberation deal in '25, we were probably paying about 13% tariffs. An incremental 20% takes it closer to 32%, 33%. That's what our guide has assumed. The latest that we are hearing that 20% is probably closer to 15%. We will -- when we report earnings in April, we will quantify that. Whether we can change guidance for that, I don't know. It depends what happens because it could change, but we'll quantify the impact of it. The way we handle pricing in the U.S. is we didn't price for -- and that's about the 20 -- incremental 20% is about 150 basis points headwind to gross margin. We did guide that gross margins will be flat in '26. So we've got a couple of things that are offsetting it. One is pricing. So we didn't price 100% for the tariffs. 1/3 of the tariffs is what has been priced largely in the U.S. And that's a combination of pricing on products that are new and rolling out, which is innovation as well as the core products. We didn't lead. We were not the leaders in pricing. We were thoughtful, we waited. The department stores have taken up pricing on private label. We want to make sure that the difference remains between our pricing and that. And we lean in more to the products that are new. So that was one piece of it. It went into effect largely in quarter 1, between January and February. So far, no pushback from the customer in terms of what they're buying for the year. And the consumer generally is resilient. So we're seeing that as we speak. The other 1/3, we actually try to offset by product cost negotiation. A large piece of our growth last year was volume. 50% of our growth this year should be volume because we're selling more, we're growing market share. So we leverage the volume with our vendors. We have also eliminated a lot of unproductive SKUs that has led to improved margins. We also opened the door with a few new vendors that drove a little bit more competition. And cotton as a commodity was a little lower than a year ago. So a combination of that has led to lower product costs. The other thing about our model, as you grow women's, you grow DTC, you grow international, gross margin probably improves 30 to 40 basis points a year. So you take the combination of these factors as well as higher full price selling, that's how we were able to offset gross margin. Gross margin, largely flat. Gross margins hit a record last year. We closed, I think, very close to 62%. It was 58%, not very long, right? So it has grown nicely. And given that the brand has momentum, given the brand is so strong, products are resonating, we think accretion of gross margins is here to stay. So that's how we are kind of addressing the impact of tariffs as the year progresses.

All right. I want to keep moving. I want to ask you about SG&A. Specifically, I want to ask you about the changes to your distribution centers in the U.S. I guess, when do you expect to see the full benefit of your distribution center transformation on SG&A leverage? And what have been the issues you have faced relative to that?

Yes. So as we are getting ready to become a $10 billion company from a $6 billion company, a few infrastructure investments we made. One was like a lot of retailers, we're upgrading our ERP. North America is done, went flawlessly. That was part of my remit as CFO. We've done probably half of Asia, rest of Asia. We're doing Beyond Yoga as we speak. And so far, it's going really well. And we'll finish Asia sometime in the next 12 months and then do Europe. And so we're largely done. What it really does is it gives us a foundation for real data unlock. We can accelerate e-commerce. We can accelerate our AI initiatives, et cetera, because now you have one common platform. I can sit in my office and I can see how each store in North America or anywhere else is performing on a minute-by-minute basis, how DCs are doing, which I could never do. So the other piece is really our distribution network, which was all built for wholesale, not built for omnichannel. Now the -- our European network is now built for omnichannel. Take the U.K. DCs that we operated, that we brought in e-commerce. That was really servicing wholesale and stores till about May of last year. We brought in e-commerce with a third party. And our U.K. business has been on a complete fire. I mean the retail in Europe is largely flat to down. We are growing double digit because we are servicing faster. We have one common inventory and the shipping costs on e-commerce have halved. So that's just an example. We're in the process of doing that with our non-U.K. business as we speak. That probably gets live in the -- by the end of the first half. And our European results in the second half of last year have been generally good. So I think Europe, generally feeling good about it. In the U.S., we had 4 DCs that we were operating, 2 were 30 years old, built for wholesale, largely manual. And so we said rather than remodel these DCs, which means you have to shut it and spend hundreds of millions of dollars, we said, let's go with a third party. And so we have signed up with Maersk. And Maersk is in the process of ramping up. That's gone a little slower than we expected, largely because technology has taken a little longer to stabilize and ramp up. As that was happening, we were seeing demand for our products go through the roof. What I did because Michelle asked me to look after this for a while last year is instead of shutting both the DCs that we were going to shut, I kept one open. I shut one because we couldn't service the demand. And that's where we've had some distribution costs that are higher than we expected, but it was able -- we are able to drive higher volume on it. The thinking is, as we said in our guidance of Q4 earnings, the thinking is that stabilizes by the end of the first half, we can shut the DC that's running parallelly. And then we start bringing e-commerce in. And so I think by the end of the year, we start seeing benefits. I mean, right now, our distribution costs are a little over 7% I think there's at least a point there, maybe more as we try and leverage demand, make sure there's inventory efficiency, et cetera. The other thing that has happened is we now have a chief supply chain leader who has distribution experience. We have also added a couple of distribution experts because what we're realizing is while we manage a hybrid system, some we operate, some operated by operators like GXO in Europe and Maersk, we really need that experience in-house to really work with our third-party providers. And it's a huge unlock. In my view, it's probably unlock for top line as well as bottom line. But that will take time and happens over time.

Yes. I mean it sounds really powerful, frankly. I mean, just to be on one global platform and have the data and have the visibility that you're talking about in your office to see every store in every DC. You mentioned AI as part of that. Can you just talk about how the company is leveraging AI to drive the business?

Yes. I mean we're leading and Michelle has personally taken this as a challenge, which is great. We are a retail apparel player, but we work in San Francisco, where that's -- the city is completely changing because of the AI focus. So where we're leaning in is on 2 areas. One is how do we drive or engage with our consumers better. And that is both online and in the store, right? So we've got use cases where we're saying, if you have a chatbot, that person that helps you shop and drive users shopping experience, how does that unlock and improve the shopping experience. For our stores, our associates require help and training on the new stuff. So we're using something called STITCH that really helps them become better sales associates. Internally, the thing we've done this year is we said no more incremental headcount. And we're going to drive more automation using AI. I've established what we call talent hubs, global talent hubs in Bangalore, in Warsaw and in Mexico, and that's beyond finance and technology. Target is a great example. They have 5,000 people in Bangalore, and it's across all functions. And so the question for us is, how do you drive that across all functions, take some processes and streamline the processes while automating it. So that's what we are looking at doing. And you get great talent. I mean that's what we're calling a talent hub. And I said we can't call it a global capability center. It's actually a talent hub. We get talent across both genders. We get talent that really knows how to use AI and other tools. And so that's the other piece that we're doing. Forecasting our revenue for the people here who are in the finance camp, we've got an algorithm that we've kind of rolled out a couple of years ago. Harvard has written a business case study start in the second MBA program, and it's about using that algorithm to really help improve our revenue forecasting. And it's probably predicts 1 or 2 points better than my wonderful associate around the world. It doesn't replace the human modeling. It just helps improvise. For example, every time I have a forecast and I discuss it with the team, I have what the algorithm tells me. When I do earnings, I have what the algorithm tells me. And we use that as a way to kind of decide what we guide, et cetera. The Board is very -- sees it on a regular basis. Now we're expanding the algorithm to help forecast profit and cost because that's the next journey. While we've got a good -- a lot of great growth, I really want to improve the flow-through and the operating margin for the company. And I think things like this will just help us get better.

Got it. All right. Well, that's -- I know that flow-through and margin expansion is very important to you. So I want to get to this question because I know it's very topical, but can you just talk about your Middle East business? Obviously [indiscernible].

Yes. No, the -- it's unfortunate what's going on. But our Middle East business is a small business. It's less than 1% of the total business. The product we get through the Strait of Hormuz is probably -- just services the Middle East. So it's very, very minor. It's largely a distribution business. So it's in the hands of distributors. And so there's -- the operating leverage or deleverage when the business is down is not pretty high. And so that's our -- and we'll talk more about it when we talk earnings in a couple of weeks. But the teams are game planning this as we speak. I mean, as you think about the impact of oil in businesses like ours, I mean, we went back, Aida and I went back and looked at what happened in 2008, what happened in 2011, what happened with the Russia-Ukraine war. The thing that we saw was sales didn't suffer at all. There was not a dramatic impact. The other piece is what happens to product costs. Cotton has remained where it is, probably a little better. So that's again -- and we have locked product costs in for the year. So that's not an impact. So -- and then there's the currencies, right? And so far, that's been okay. So as you think about this, depending on how long this goes, we have game planning, like we had a tariff task force as part of my transformation office, we've got a task force now game planning this as we speak. But if the consumer remains solid as no signs yet, I think we'll be okay.

Okay. All right. So maybe in the last 2 minutes, I want to ask one capital allocation question. And it's how are you thinking incrementally about near-term capital allocation priorities as well as dividends and buybacks as you [indiscernible].

Sure. So we spent about 3.5%, 4% of our revenue on CapEx. 2/3 of that is to grow the company. So think about opening doors, remodeling doors. We probably -- between opening and remodeling, we're probably doing a door a day for the year, which is great. We also spend on technology, think about e-commerce, think about some of the AI investments. That's about 2/3 and about 1/3 for infrastructure, which is ERP upgrade, some maintenance work. So that's one piece of it. We are a dividend-paying company. Dividends grow in line with net income. Every year, for the last few years, we've taken up dividend 8-odd percent. We normally do that in the second half of the year. And then we buy back stock to offset dilution. If there's more cash because our balance sheet is so strong, there's a lot of cash, we return more back to the shareholders. So we exited Dockers, probably generated a couple of hundred million in cash. That's all been returned back in the form of an ASR program in Q4 and an ASR program in Q1. And so that's the way we think about it. If there's more cash, have a discussion with the Board, and there's nothing to do because we are now focused on 2 narrow businesses of Levi's and Beyond Yoga, that's something that we can always accelerate.

I think that's a great place to stop, Harmit. Thank you so much. Always enjoy speaking with you and congratulations on the success and [indiscernible].

Thank you, Jay. I appreciate everybody taking the time. Thanks a lot.

Thank you, everybody.