Levi Strauss & Co. ($LEVI)

Okay. Great. It's Matt Boss, retailing department stores and specialty softlines here at JPMorgan. Really happy to host today the team from Levi's, CEO, Michelle Gass; and CFO and Growth Officer, Harmit Singh. So look format for today is fireside chat, and we'll open it up at the end for questions in the audience. But with that, Michelle Harmit, thank you for joining us, and thanks for joining again at the Retail Roundup and congrats coming off of another very strong quarter.

Thanks for having us, Matt.

So maybe to kick off, And exactly on that point coming off of the strength in the last quarter, the organic growth rate, another quarter of high-single digits. Maybe if we think about growth building on growth, we had strength in '25, the strength now does kick off '26. How best to think about your results relative to the denim market, what you think is company specific? What maybe is industry?

Yes. Well, so first, I'd say we are really pleased to deliver 9% organic, 14% reported and to your point, coming off of a 7% growth last year. I'd first say that this is a direct result of our strategies. Our strategies are gaining traction and the strategy that they're working. And first, I would say, this move to become a best-in-class DTC first retailer, so DTC is now half our business, it will be half our business for the year, and that's working up 10% in the quarter, as you saw, 7% comp growth, 16 consecutive quarters. So this isn't like a flash in the pan, right? Not even a laser thing. I mean this momentum has been building and the DTC results, and it has not been at the expense of wholesale. So wholesale also had a great quarter, up 8%, and we can dive into that. So as we look at it, it's really strength across the board, which goes back to the strategy we're working. We have strength across every geography. We have strength across men's and women's, tops and bottoms. The list goes on. The category is growing, right? In fact, in the U.S., it's even accelerating a bit. We're the leader in the category. So I like to believe that we're helping fuel that growth. And we're doing it through innovation. So our core in the business is really healthy, but our fashion and our newness is really elevating -- resonating and then marketing. So that is helping. We'll probably talk about that as well in terms of we've been a brand-led company for a long time. Last year's campaign about Beyonce was a huge success, put us on the global stage. And then this year, we kicked off literally on the global stage with the Super Bowl with our new brand campaign, which is off to a great start, delivered in the quarter, but it has a long runway ahead. And the last thing I would say is it's around execution. So the good news is we sit here today and as we go into, I call it, this next phase, next chapter of our transformation, it is all about execution. And we spent the last couple of years sharpening our strategies, making some big decisions like selling dockers so that the entire organization could be focused on unleashing the potential of the Levi's brand still nurturing beyond yoga, and then as we grow, driving that more profitably, and it's working.

Harmit, maybe if we could talk about the composition of that underlying organic as we think about units relative to AUR and just pricing power that you see for the brand globally.

Sure. The -- just building on Michelle, it's not 1 element of the business that's driving outsized growth. it is every facet of the business. So what I'd like to call the par of the end. So you think about -- and that will answer your question, which is the U.S. was up international is that Wholesale was up direct-to-consumer was up. Women's was up, men's was up. And AURs were up and we were selling more units. I mean -- and it's a good balance between AUS and units. I mean I do believe as we expanded our addressable market 15x from $100 billion denim segment, we were not even playing in the premium denim segment. With the launch of Blue Tab, now we have entered it. But as you think about the expanded TAM 15x larger $1.5 trillion, think about non-denim bottoms for men, which we have launched. We're just scratching the surface. Think of denim skirts and dresses. Just launched, they're scratching the surface, waste up which is the other part of the end tops were up and bottoms up. And we started tracking what we call the new TAM the new TAM grow this quarter delivered 25% of the growth. Last year, it delivered 1/3 of the growth. And it's all built around the denim aesthetic. It's not that we're just launching a top for the sake of top making sure the top or the bottom has some element of denim. Linen has an element of denim. Our outerwear has an element of denim. So that's the way I think to think about the growth and why we feel really good about the growth. So that's your AUR and your unit question. You had a second part to that question. Was that?

Just the balance and the opportunity that you see across regions?

Okay. across regions. So Asia -- so if you think of -- our guidance was, I think, 4% to 5%, we kind of delivered 9%. So what drove the outside growth -- it was wholesale. 2/3 of the growth was wholesale, primarily Europe and the U.S. And I'll talk about that in a second, and it was Asia. China, after a long time, grew 8%. right? It's a small piece of the business. We think there's an opportunity. But India grew, Japan grew and the other countries. And I think that was a big piece. In Asia continues to be underpenetrated for us. only because you can argue half the world's population is in Asia, and it's about 20% of our business, right? The brand is really strong with the consumer and we are leveraging that. And as a CFO putting I'm a CFO hat not the growth hat, is wanting to look at Asia's operating margins. You look at the last 3 years, has grown every year. Because as you drive the volume leverage, you're going to drive that throughput. So that's really, Matt, to your question. And on wholesale, again, the power of the end, we grew -- the wholesale growth was largely driven by women and by tops and balance between AUR and units. And I think Michelle's point on the strategy the lean-in to DTC is beginning to have an impact on wholesale because as our customers start seeing it working, seeing in our own business in our own e-commerce, they're being into line, you go to Harold you'll see the best representation in Macy's of our men's floor space, more denim lifestyle. You look at the women's more denim lifestyle. So I think you begin to see those elements come to life. It just takes a little longer.

Mean double-digit direct-to-consumer growth in the latest quarter. Can you talk about new customer acquisition. I think it's a perfect and a great example of what's happening.

Yes, we are seeing that. And you're able to really understand that with e-commerce because you have a lot more information. But 70% of the new customers we see coming into e-commerce are in that younger consumer band. So that's really exciting. And we're doing that, and it's again, not at the expense of the multigenerational impact that we have. But we're not getting the results -- these results just on the back of our existing customers. Surely, we're bringing a lot of new consumers and it speaks again to the strategy, the product is relevant. Building on what Harmit was just saying, this idea of taking everything that's great about Levi's. We are known iconic for our denim bottoms, and we will always protect that. But now to the consumer and the consumer is voting with their wallet saying they want us to do this, to expand into a much bigger pond with really playing in the entire apparel category. So what was just denim, we still track that closely, but 15x. We're talking $1 trillion plus in the apparel market. Now with that comes the responsibility to be very targeted on how we play because you don't want to be all things to all people, right? And there's many case studies of brands that get too diluted and lose their focus, and that's not us. I mean as we have gone after categories of tops, we want to make sure that it's complementary to our bottoms business. It always starts with denim, but it doesn't mean that everything you're going to find in our store is denim, but we'll have the DNA of Levi's and that's working. But we had -- we had to build the foundation. We brought in new talent. We brought in new vendors, new capability, and that's what's helping to really accelerate the growth. And so I think as we're sitting here a few years from now, people are going to look to us and see us not just going to live our jeans, but they're going to see us as a place to go shopping head to toe. Back to your point around -- so it knits together because how are we getting these great results in DTC. I mean, denim lifestyle is driving a big piece of it. Women's is driving a big piece of it. And if you look at -- in parts of the world in DTC, women's is half the business in certain geographies when we can create that whole experience. Wholesale is lagging because we don't control that experience, right? But as Harmit said, they're drafting off of the wins. Our key customers are going into our stores saying, "I want that. I want that." And that's happening in our mainline doors. It's happening in outlet. So we have also those multiple tiers to appeal to different consumers. The other piece that we're doing to get after these incremental categories, if you take women's, it's 38% of our business, that should be 50%. Like I said, we see pockets where that's already happening in parts of our DTC business, but we are creating that experience in the store. So if you're in our main -- most of our mainline doors here in the U.S. we've completely remerchandised. What used to be you'd go into the store, you'd be hit with men's first and you'd see lots of stacks of jeans. We still want to sell a lot of jeans. Now if you go in, actually, we put the women's presentation in the front. -- because the guys know to go in the back to get their 501 or 511, but you're getting that shopper, that female shopper who's walking by and seeing the windows and they're like, wow. And it's head to toe, right? So -- and it's not just tops. So tops include yes, the buttons down, the blouses, the T-shirts, the sweaters, but we're doing skirts, we're doing dresses. And all of those categories feed into this denim lifestyle. And that is what's driving momentum. So for women's to be up 13% in the quarter for tops to be 13% and by the way, on tops, I'm kind of speaking to that female strategy, but tops are working for men as well.

And you're doing it in a full price selling way. I think one of the things that we've talked about is you actually rationalize SKUs got back to a strong foundation, and now you're growing off of that foundation. Maybe it's a question for both of you, but Harmit, on the SKU rationalization, and as -- and how that is now having an impact from profitable sales, not just sales. Maybe if you could speak to how that.

Sure. and give Michelle a lot of credit for driving real focus on really making sure 2 things. One, we are really focused on big bets and more commonality around the world. So if you think of the low loose or you think of non-debt implants for him, these are globally directed assortments, right? And that doesn't mean the open to buy goes up. That's why I come into my CFO and said, "No, no, no, you can't do that. We have to look at the assortments that are not as productive. If you have 15 colors of black because over time, that's what's happened, let's really take a hard look and reduce that because the consumer doesn't tell the difference, but we spend maybe different fabrics, different vendors, et cetera. So what we've really done is we have reduced these SKUs, probably 25% around the world, that has led to better negotiation with the vendors. It has led to lower markdowns. And so -- and I don't think we're done, right? Because that's really a journey. I mean if you think of directing assortments. We have started with mainline, which is our own store, let's think of DDC. We're probably over 50% now. We haven't yet touched wholesale. And that's the next journey you start now making sure you can rationalize some of the SKUs in wholesale, start rationalizing directing more assortment so that when a consumer walks in, he or she sees very similar stuff around the world. So that's helping margins. The other thing that is happening is we are reducing promotions. The product is working. You can drive more full price selling. So one of the ways we're able to help offset some of the tariff pressure and why we feel gross margin has an opportunity to continue to grow is we're just starting that journey. And we're now in any way close to even 70% of full price selling, right? I mean, Europe does a very good job followed by Asia, followed by the U.S. And as we build these full price stores, as we direct more assortments, I think that's an opportunity.

Michelle, I think you've cited an additional $10 billion TAM on the premium side -- where are you today? Where do you see that opportunity? Is that bringing in a new customer?

So we're very early in the journey, but the early indications are positive, really positive. So Blue Tab and it's part of our segmentation strategy. So the core and the backbone of our business is Red Tab how most people think about Levi's. Yes, the vast majority we have signature, and we can talk about that, too, especially in an environment where there is pressure on a segment of the population that business was up 16%, and that is sold in places like Walmart and it's on Amazon and really speaks to that consumer looking for more value, price point, $20 to $30. Blue Tab. So very excited about Blue Tab. So this is sort of the pinnacle expression of the Levi's brand, very premium, $10 billion addressable market, and we are less than 1% share. As the denim leader, even if we capture our fair share, that's a sizable incremental opportunity. We see parts of the world like so really inspired by places like Japan, which has a very sophisticated consumer that actually makes up a sizable part of the business. And I should back up. So Blue tab, which is what we're calling it to the consumer was inspired by previously, we would sell things like Japanese denim salvage. We would do made and crafted was another part of the line, and it was a bit fragmented and it was really through a consumer who said, "Well, I like the stuff with the Blue tab because that's the good stuff. It was like, okay, let's just simplify and let's create this new category for us called Blue Tab. And what started, again, based in denim, call it, Japanese denim bottoms, we are now developing full collections. And that is going to allow us to get into bottoms, tops, jackets, blazers, other fabrications and perhaps not everything from Japan. There's amazing fabrics out of Italy. So to answer it, we see a lot of upside. It's upside to the business, and it creates a nice halo to the entire Levi's brand.

Now to piggyback off of that, as you kind of alluded to. I mean I think one of the things that's really resonating is that there is something at Levi's for everybody. So maybe could you elaborate on the segmentation strategy what you're seeing across maybe all of the income demographics?

Yes. Yes. So kind of further building on what we're seeing. So let's go back to the core of our business, which is Levi's. To date, and as we all navigate another kind of time of uncertainty, to date, we have not seen an impact to demand. We're staying very close, but we're a great value. I mean it's the quality consumers are responding to the innovation, to the newness. So the core of our business is really healthy. And then as I said, signature so just talk a little bit more about that Signature by Levi Strauss targeted at that consumer who wants value, but we're still going to give them an amazing product. And as the Signature team has seen what's working for Levi's, women's, head to toe, denim lifestyle, tops, jackets, sweaters, layers, et cetera, they've built now that innovation into signature, and it's really accelerating up double digits in the first quarter. So -- we do -- I mean, we do offer something for everyone, but yet in a very focused way. And I think that's been a big part of the benefits we're seeing. And we're looking at this around the world. and focusing our resources on because if what's going to resonate especially in a time where consumers are going to look to brands that they know, that they trust, when the wallets get tighter, we have to work harder, right? If there's more pressure on the choices they have. So we've got to show up with excitement. And that's where, as Harmit was talking about we've really rewired this company. We're still requiring it to operate as a best-in-class retailer, and go-to-market has been a big part of that. So how do we get more leverage and scale, so what Jeremias referring to the directed assortment or having a more aligned assortment globally, that is great from a focus standpoint. So the entire company can get behind what the big bets are. And so in first quarter, it was all about the '90s look, grunge prep as we called it. And grunge prep is happening all around the world, and that was a big -- that newness was a big contributor to our growth. That commonality is now 50% that will probably approach the 75% mark. So you just think about the efficiencies and the scale you can get helps the top line, and it will help the bottom line help margins. Yet there's still room in that 25%, 30% for the markets to get what they need to be locally relevant. So we are staying super close and then just the last thing I would say on pricing because it's a hot topic in this environment. I mean we put a lot of work into how to price, where to price to mitigate some of the tariff headwind and then to also say we have pricing power, so let's price for the innovation, let's price for the newness. And like I said, that demand is continuing. It's continued right into the second quarter. And also probably worth mentioning, and Harmit can speak to this, but back to tariffs, as we increased our guidance just a couple of days ago when we shared on the call, we also have not yet baked in what could be some favorability from a tariff standpoint, and that's worth about $0.07 on EPS.

Yes. I was going to ask you, I mean, you historically take a prudent approach. There's prudence on the tariffs. Maybe on the -- and so if you could maybe touch on that. It seems like you also have taken a prudent outlook as it relates to the consumer. So maybe beyond the fact that, as Michelle, you just said, not seeing any impact today, what have you embedded as it relates second quarter and maybe for the back half, is there what we potentially could see embedded in your guidance?

Yes. We beat Q1 by a mile, top line, bottom line. we probably flowed 1/3 of that beat into full year. And there were a couple of reasons for that. One was it's early in the year. What we've demonstrated is we can lap strong growth with strong growth, right, because of the different things that Michelle and I had talked about. We were prudent only for a couple of reasons. One was early in the year. The second was given the macro uncertainty, it was important to ensure that the guidance is one that you could beat over time. and respond with agility, especially when your product is hitting home to the consumer, depending on where -- how the consumer is at any point of time. And so that's really what drove it. So what are the upsides, if at all? One is we assumed tariffs at the old rate of 19%, 20%, not at the 10% today, that upside is about $35 million balance of the year and $0.07, as Michelle said. Obviously, there's an upside in '27. There is $80 million of tax refunds based on what tariffs we have paid. That's not incorporated. We were asked the question earlier by a large institutional investor, whether that means we'll have more cash to return back to the shareholders. And our view is our investment needs for the year all factored in. right? So if there is more cash, it's something we'll work with the Board and think hard about because we have done that with doctors -- the sale of dockers, we returned all that cash back. And so as we think to your question about the balance of the year, Q2, I think, is appropriately reflected. I mean there is that change because of the distribution ramp-up in Europe last year. And the second half is prudent. I mean, second half, I mean, you do the math, you say, "Oh my God, you guys are slowing trends. But we are not slowing the trends. There's nothing that we're looking at and say, "Oh my God, trends will slow. It is just being cautious about the outlook. And so that's the way we're thinking about it. Yes, we have locked in with oil rising. We have locked in the base contracts for Ocean and for Fred through early next year. There are some surcharges depending on where oil is. We are working through managing that as a question. The other thing that we really focused on because we've heard it from all investors here and from the sell side is drive higher flow-through on incremental revenue. And you were with a bunch of leaders a couple of years ago. We bring 250 leaders together, and we just finished that a month ago, flow through and SG&A management with a prime topic. -- people understand the playbook. And the things we are doing, because it's not just going to happen by chiseling away at costs. We've got a couple of things. One, we're leveraging AI big time. we've got about 700, 800 agents right now, really focused on 2 things. How do you improve the consumer experience, but more importantly, how do you drive more operational efficiency? Headcount is flat despite a growing business, right? And then we've got these global talent hubs around the world where we're saying, let's take processes, in different parts of the world and really drive efficiency. So we've got a few things on the cards, and that's what really drives the second half of the year or the next 3 quarters.

Michelle, if we think about the mid-single-digit organic top line outlook for the year, maybe if you could just break it down by what you're seeing across the regions. Where are you excited? Where do you see the most opportunity?

While we see opportunity across. And when we -- so we have the road map that takes us from -- in the 6s to $10 billion, hopefully beyond at some point. And you can map that growth by gender. So we expect to continue to see growth in men's, but we will expect to see outsized growth in women's Think about women's 11% growth last year. Q1, we just reported 13%. So it's at a new level, right? So that is a big chunk of the growth. Second, the other way we look at it is category. So continue to have nice steady growth with denim bottoms, but then also layer in nondenim bottoms and then layer in all these categories in tops and denim lifestyle. So you can ladder get to your $10 billion that way. And then to your question, we also have the build by geography. And we expect -- so as we guided this year, we haven't guided further out. So I'll stick to the narrative. But for this year, we expect Europe to be in the mid-single digits. We talk about the Americas being in that probably low-single digits. Hopefully, we outperform there. And then Asia, high-single digits. And you think about, especially Asia, we are really underpenetrated there. And we both go back and forth there a lot to see the opportunity. And every time we go especially markets like India, I mean we're just scratching the surface. Japan has been on fire. China. So we -- it's been a long time since we've seen China grow. China was up 8% this quarter. So we feel like -- we're not going to give a victory lap, but we are seeing the green shoots with a new management team, with a tighter assortment, frankly, taking the playbook that's working for us around the world. And the last one, I would say back to the Americas, Latin America, a ton of opportunity there. Mexico is our second biggest country as it relates to Levi's and there's still upside. So that U.S., our most mature market, you're seeing the U.S. grow. We're up 4% in the quarter. I mean you go on. And then lastly, just on Europe, I just got back from a trip there. And even in established markets like I shared on the call, Italy, which is sort of the bar on fashion and a bit of Ameca, we're growing really strongly there, and that business has doubled since 2021. So we just look across and we literally have it mapped out in terms of where we can find the growth. A lot of that's going to be fueled by DTC continuing this comp growth that we're now sharing comps officially. So you can expect to continue to hear that from us. We see a lot of productivity gains that can happen still like we're pleased with as much comp growth that we've generated in the last couple of years, but we benchmark ourselves to others, and we say there's still a lot of upside there. Of course, we're going to build new stores. We've guided 50-ish net new this year. That continues to be upside. E-commerce across all these geographies. And then I'll end it with what is supporting all this growth, of course, is the product how we show up in all these places, both in wholesale and in our DTC channels and being a brand-led company and making sure that we're staying connected to our consumers around the world.

Harmit, gross margin. I think we've talked in the past about in the algorithm. Is 30 to 40 basis points a year, the right algorithm -- or what are the puts and takes on?

I think -- so I mean, let's say, Q1. Let's start with Q1, right? And so Q1 was where we saw the full impact of tariffs relative to a year ago because I think it was around this time last year when we -- second April and liberation there. So the way we've kind of -- our strategy to offset the tariff impact is working. We took some pricing. We're lean into lower product cost with our vendors, curationalization, more vendors, et cetera, and driving higher full price sales. So if you break up Q1, I would say -- and we had a little bit of an FX headwind that can largely offset tariffs. Q2, tariffs will be offset by the actions we're taking. There's a bit of FX headwind in Q2. That's really driving the decline with tariffs should be offset with the actions and then acceleration of gross margins at end of the year. So we did raise our gross margin guidance for the year from flat to slightly up. To your question about what's the regular cadence of tariff of gross margin accretion. 30 to 40 basis points is natural. It's just driven by the business model. What we are trying to accelerate growth to and succeeding is gross margin accretive. So women's is gross margin accretive. DC is gross margin accretive, men's -- sorry, international is gross margin accretive. Now if and when our tops business, which is right now we sell 2 bottoms to on top, and we had targeted to get to 1:1, right? Like we saw in the women's business, which we diluted the gross margin, we're not selling enough, now it's accretive. -- our view is that top right now slightly dilutive to margins because we don't have the volume. But when we are able to get the volume, our view is that could be at par or -- and I haven't built that into that equation. So there is clear opportunity and full price selling, we have a bit of option there some trigger points from that perspective.

So relative to the 12-ish percent margin this year, market fair to say mid-teens target on track over a multiyear period?

Yes. So the best way to break it up simplistically, it's never this simple. But if you take the 12 to the 15 was the road map, If -- I mean, one is gross margin accretion, 30 to 40 basis points a year. So on a 5-year basis, that's 200 basis points. The second is the focus and flow through and the company being a mid-single-digit company on a sustainable basis drives leverage on SG&A. We haven't talked distribution. Distribution costs are slightly north of 7%. You've got a whole activity on remapping that. We think we can get a point. So in that SG&A, you said probably 100 basis points of leverage, 100 basis points of distribution. That is more than 16%. Our view is because you're a brand-led company, maybe we can invest a little bit more in advertising, right? Companies have done that, if you're reaching out to more consumers. So that's your part to 15%. Our EBIT margins were 9% in '23. We'll close this year closer to 12%. So we are on track.

And we talked about cash just how you're thinking about capital allocation priorities?

Sure. I think the best way to think of capital allocation is 3.5% to 4% spending that on CapEx. 2/3 of that to grow the company, open new doors e-commerce, some AI investments and about 1/3 in what I call infrastructure maintenance. So that's your pace dividend-paying company. We increased dividends probably 8%, 10%, in line with net income. -- that continues for a while. And then buybacks talk to offset dilution. And if there's more cash like it happened in the last couple of years, return that back to the shareholders. .

Maybe before I open it up to some questions in the audience are met with all of the momentum and everything that you guys are building, why leave us now if it's for golf, you better be recording your scores. We need to see that.

And I used to better than me and golf, but we'll figure that out. But the -- there's never a good time, especially when the business is having the sustained momentum, but I've been with the company 13 years, I'll probably leave and I'm closer to 14. We are finding our my successor and making sure he or she lands well, et cetera. I think the companies are in a real good spot. Michelle has been on board for a couple of years. We've got a great executive team. The business has momentum. I have a fantastic team, some of whom you've talked to, right, over the years because I said let's get public ready. And so I think those are the factors. I mean, People have asked me, what are you going to do? I mean, I don't think I'm going to be on the golf every day. But the way I think about it is I want to do what I'd love to do, which is build and transform businesses now with a bit of an AI experience. The second is I love to work with people. So I want to unleash talent to the folks that I work with and spend some time with the family. They were like, okay, me it's time to spend a little bit more time. So that's the way 1 is thinking -- but I'm here for a while I've got a couple of quarters, definitely a quarter to deliver. And then Michele and the team can will high 5 and pass on the baton to where takes us to the next level.

Maybe we'll open it up to the room for -- there's microphones on each of the tables.

Okay. Harmit, just congrats on a great run. I had a question around GLP-1s, actually. So I remember during COVID, you guys were very vocal about something like 35%, 40% of waist sizes that changed? There's this balloon pant trend this time around, it seems like the societal impact, the weight loss impact is bigger than that time. It could be more sustainable, but I haven't heard you guys talk about it as much. I'm curious if there's anything you could share if you see it as an opportunity? Obviously, like the category lends itself to weight loss or weight changes, right, skinny jeans, baggy genes, that kind of nomenclature. So just curious like what the opportunity is there.

Take it -- so we've asked the question a lot. We have not gotten a definitive or conclusive answer that, that is fueling our growth. We will happily take the demand as consumers shift sizes. We might be seeing a little bit of it in our Beyond Yoga business because we have seen a shift to some smaller sizes. I mean, obviously, that's a much smaller business for us. But kind of broadly speaking, hard to pin that down that, that's been a major factor. But we're looking, we're studying it. And like I said, we will we're more than happy to fulfill that demand. But we haven't seen like an overall in our waste sizes in Levi's. We have not seen a shift down to make that -- but I could say, are people entering the category and are people shifting sizes and then it averages out, there could be that dynamic. But just from a data standpoint, our average was sizes have not shifted, but we are seeing a little shift in beyond yoga.

And the only thing I'd say is accessibility to the drugs globally is happening -- has happened recently at a lower price point. And so that's upside. -- if it happens, is about. So it's difficult to build into model, but it's a great question. .

How about on the AI front? Maybe, Michelle, how are you implementing it into the company on a basis? What are you thinking about longer term how it could impact the business? And then maybe Harmeet, from a cost perspective, what you think it might mean? And I'm guessing it was not in the 15% target as you initially constructed.

Yes. I can start off. I will say it's, for me, personally, a huge priority. And going back even a couple of years and seeing -- I mean, AI has been happening for a long time, but sort of as it hit this next curve of opportunity and capability myself, Harmit, the team, we have been all over it and making sure that we are working with all the right partners, and we are working with the big and the small to help us in our journey. The 2 priorities that we have with AI is how can AI enhance the consumer experience and then how can AI help us drive more efficiency in the business. On the consumer side, we've got a lot of experiments happening. I've been really excited to lean in and be piloting ways to help the shopping journey. So if you think about the online experience, we do -- we have AI embedded in the core of even if you go on levi.com today, enhanced outfitting, enhanced personalization, the overall experience is better. the challenge I've had for the team is how you take that to the next level. We all know when you're personally playing with chat GPT or Claude or whatever, I mean all kinds of recommendations that can come up with -- so think about a day where you do have the shopping agent, we call it Indigo, where it knows you so well, it can proactively ping you on new drops. You don't know what to wear to a concert this weekend. It knows what's in your closet, so it's going to tell you, well, so if you say, "I'm that, I'm going to this concert. I'm going to go see Ed Sharon, what should I wear? And they'll say, okay, well, you already have those 501s. And here's a great top, who's a great T-shirt, he's a great trucker. So not only like saying maybe a complete out, but it's also going to know what's in your cloud you just think about that proactive and reactive engagement. We're actually in pilot stages right now. We're testing it in our employees first because as we all know, you got to figure out, okay, how is this thing really going to operate, get the bugs out. But I see that in the near-term horizon. And then I can hit the efficiency all hands over Harmit to. We have so many case studies across the company on how we are looking to have AI drive efficiency. It's in everybody, all of our leaders' goals. And I mean, I could take any department and they probably have 10 to 15 different ways they're using AI from marketing to legal, to merchandising, I mean, design. We're working with a couple of really interesting platforms on how it doesn't take the creativity out of the designers, but how can you drive -- okay, that used to take me a whole day to sketch this. I can do this in 10 minutes. It's going to give me 100 different options as well as process automation. So we see a big opportunity.

Yes. I mean the best way to put it on my CFO had the best way to handle this is constrained dollars, right? So we've said no incremental dollars for new headcount. So with a business that's growing and half the growth is coming from volume, we're opening due dose, et cetera. that means, okay, you've got to reallocate your dollars differently. And people need to read. So what we said to the leaders when we brought them together a month ago is we're keeping head count flat. If you have x priorities and now you have new priorities, find a way to trade that off. As people leave, we've got these global talent up, think of taking processes there, et cetera, et cetera. I'll give you use case as part of my team. Wholesale is a big piece of our business. We get orders in from customers. 20% of the orders are manual. The rest is electronic. I have folks and my team who actually input those orders. It takes them 2 to 5 days. It is a 10% accuracy factor. That's now happening in 15 to 20 minutes, right? So it's happening really fast. We have tested it out. We're rolling it out in the U.S. And now the focus as orders grow, we don't need to add people. By the same folks, we're helping them to scale up so they can call our customers and get the checks back. So it will just lead to a different way of doing things. And that's how we -- so we're taking these use cases and a lot of these use cases billion part of it is they've been created by folks within the company. And so the HR team is working on how do we lean into upscaling. We are working on how do we take these agents and change the way we work and get a lot more efficient. So we're building through that. I think it's a journey. It doesn't happen overnight, but we are long on this.

Yes. I got a couple of questions. First of all, you talk about licensing at all a tremendous amount of manufacturers that really license you that you already have. So that's 1 question. Another 1 on marketing. We've seen in denim some real celebrities, is that in the future potential also. I'm not saying Sydney Sweeny, but some people like that. Another question as far as on the premium number, as you go into higher price points, tell me -- give me an idea of the differential between that levy where it's going versus where to design the guys up -- there still is a major gap. And the other question is when it comes to selling denim, the most important thing is that the customer finds the size and the which means not only the waste size but the length inspire. And there seems to be tremendous innovation taking place today where some retailers are getting weekly deliveries of the fillings as they sell them out because they're using these ones to on the entire inventory and transmitting it to you. So that's helping a lot, I think. So I'll maybe talk about those 4 things. I don't 4 questions if I can remember I can start with the marketing one. I'll do the blue tab piece because.

I'm weighing examples Yes. So we're doing that, Danny. So we -- I think we actually set the trend, if you will, that others have followed. We've done that for a long time. And if you think about last year with our Beyonce campaign, which was phenomenal, that came out of Beyonce naming a song after us, Levi's Jeans. I mean, definitely in the category, if you sort of can't make it up. And we leaned into that. So she does the song our Chief Marketing Officer and myself, we reach out to our team. Let's see if we can make something work. And then we had this amazing campaign. And I mean, Beyonce is 1 of the most celebrated artists of our times, right? So we hit the jackpot with that one. And she's been a great partner. In fact, Levi's and Beyonce been friends back through the '90s. Our campaign that's running right now, which I mentioned we launched on the Super Bowl does tap into global and local influencers. So -- and right in that core consumer target of that 20- to 30-year old. So Doc, the basketball player, SGA, Rosy, 90 million Instagram followers becoming a global icon in their own right part of Black Pink. Now she's gone off on her own. And we're now doing a collaboration with her that's starting off in Asia. Multiyear collaboration may go forward. So our team does a fantastic job. And you can see it if you follow our handle on Instagram, both at the local and kind of macro culture as well as the micro cultures of driving relevance. So we say we like to operate in the center of culture, but we really shape culture. And I think what's really exciting for this year, Matt, some of your earlier questions on how do you support that tailwind coming off 7, now we deliver 9. We just raised our top line guidance, held some back just in case things get even more uncertain what have you, but we've got a whole lineup of marketing activity this year. We dusted Super Bowl or hosting multiple World Cup games. We just yesterday announced a partnership with a company that really brings out emerging artists. So we're hitting it across fast and culture, sports and music across the board. So more goodness to come on that front.

So a couple of things. You asked licensing. Our kids business is all licensed. We've got a great partner globally. I mean it's a business we -- when we look at it, we say, it's not our -- it's important to get the kids into Levi's, but it is best handled by a partner who does as an example. And -- so that's your question 3 was on Blue Tab. Last year, we tested it in a few markets because we don't want to be comfortable or we want to make sure the consumer is comfortable paying 2.5x red tab is, right? So you go to our stores is between $80 to $120. Blue Tab is about $250 to $300. So I'm wearing the maiden kraft. I bought it in China. It was made and crafted 2 years ago for $250. Now you walk into a store, the same made and crafted is now rebranded as Levi's because it was really made and crafted a sub-brand, and we are selling that across the world. It's blazer is in that in and around that price range. But the consumer is giving us the permission based on our testing to expand it because the priorities well differentiated. We have to do a better job story telling it. That's why we're testing it before we scale it. This year is an expanded test and next year is about rolling it out. So that's your -- your third question. Your fourth question was, yes, sizing huge opportunity continues to be. We've got -- we're using RFID, so people can understand it. So I'll give you an example. I think last year, we were all in Dallas. We were not playing in Texas. Now we've got our full price stores in Dallas, a wonderful 3,500, 4,000 square foot store hitting the ball out of the park. But no 30, I'm a 34 in-seam. We don't sell 34 because they can't stock it. But as we are reducing our SKUs and rationalizing it, we're saying, let's get the right sizes. Right? You can still buy it. You'll just have to do it on an iPad because it's available in some distribution center. So it's clearly an opportunity. It's something we're working on. Now we have the technology, and we are rationalizing SKUs to make sure we are able to make wafer pre.

On the licensing, I meant like outerwear also footwear. I mean, there's a lot.

Dabble with, what should we do with footwear. The way we have landed in foaming the age or and collaboration, $800. But -- and case, are we on footwear and Michelle, feel free to jump in when we thought about denim lifestyle, we did look at categories that we want to lean in and categories that we've got other experts doing a better job. And footwear is a category we said we will collaborate with experts, New Balance, Nike, versus drive more footwear versus having a partner of their licensing under our brand. We have tried licensing footway, quality, not great. And so we lean in and said, we had a small footwear business in Europe, $100 million, $150 million business. We exited that and said we're going to grow footwear, but do it thoughtfully and high quality. Outerwear, as we start growing our outerwear categories, we'll take a look at that. But in the U.S., wholesale is largely licensed. Our own stores that's out of the way we kind of manufacture ourselves. Rest of the world, we do it ourselves. So those are the things we look at. We've got some great partners. They do a phenomenal job, why distract ourselves we've got enough to do and those things are working so.

I'll amplify that. I mean, strategy is about focus. We've made tough decisions, including selling dockers, which had been part of the company created by the company in the '80s. So there will be surgical opportunities, but we see so much opportunity with the categories we've talked about, premium denim, Red Tab denim signature and then head to toe denim lifestyle in these tops categories that today we're just scratching the surface. So that $10 billion is real. My friend, Matt.

Thank you for your time and congrats on the success.

Thanks, Matt. Thank you.