LEVI - NYSE

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Third Quarter Fiscal 2024 Earnings Conference Call for the period ending August 25, 2024. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company’s website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss and Company.

Thank you for joining us on the call today to discuss the results for our third quarter fiscal 2024. Joining me on today’s call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer. We’ve posted complete Q3 financial results and our earnings release on the IR section of our website, investors.levistrauss.com. The link to the webcast of today’s conference call can also be found on our site. We’d like to remind you that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular the Risk Factors section of our Form 10-K for the year ended November 26, 2023, for the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today’s press release. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable efforts due to the challenge in quantifying various items, including, but not limited to the effects of foreign currency fluctuations, taxes and any future restructuring, restructuring related severance and other charges. Finally, this call is being webcast on our IR website and a replay of this call will be available on the website shortly. Please note that Michelle and Harmit will be referencing constant currency revenue numbers unless otherwise noted. Today’s call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I’d like to turn the call over to Michelle.

Thank you, and welcome, everyone, to today’s call. In Q3, net revenues increased 2% in constant currency and 3% when adjusting for the exit of the Denizen business. While we had higher expectations for the quarter, we saw acceleration versus H1 driven by the Levi’s brand, which grew 5% globally in Q3, marking the best quarterly growth for Levi’s in two years. We are pleased that the underlying fundamentals of our business are getting stronger, and our key strategies continue to gain traction, including DTC up 12%, the U.S. continuing to be positive and Europe returning to growth. Profitability continues to improve as evidenced by record Q3 gross margins of 60%, enabling us to deliver 250 basis points of adjusted EBIT margin expansion and double-digit adjusted diluted EPS growth. There are three areas that did not meet our expectations this quarter: Dockers, China and Mexico, and we’re implementing plans to address these headwinds while making strategic adjustments to position the company for the long-term. First, through our transformational pivot to operating as a DTC first company, we are narrowing our focus to realize the full potential of the Levi’s brand as well as accelerate Beyond Yoga. Accordingly, we are undertaking an evaluation of strategic alternatives for the global Dockers business, including a sale or other strategic transaction. Dockers is a high-quality business with significant future opportunity. It continues to be a global leader in the khaki category with strong, well established American heritage. We are committed to identifying the right path forward that enables both LS & Co. and Dockers to reach their maximum potential and value. Second, while China only comprises approximately 2% of our overall business today, we continue to see significant long-term potential of this important market. While the work we’ve done to improve our business is showing green shoots, we are not satisfied with our overall performance and the macro backdrop has further exacerbated these challenges. We are focused on the controllables and are taking decisive action to reset our business and improve our execution in this market. We’ve replaced our China Managing Director and have appointed a 15-year veteran of the company with a strong track record of performance in Asia as the interim leader. We have a strong tenured team in China who will continue to support this transition. And third, while Latin America grew low single-digits in the quarter, including double-digit growth in Mexico DTC, Mexico wholesale underperformed. Performance with our key customers has been mixed, some for reasons within our control and others external, including a cybersecurity breach at one key customer that has impacted shipping. We’re working closely with our wholesale partners to stabilize this business and have recently made changes aimed at improving our performance in this channel. Before I turn to the details of the quarter, I want to underscore that we have the expertise in place to address these issues and make swift progress. In July, Gianluca Flore joined the company as Chief Commercial Officer for the Levi’s brand. With 20 plus years of retail experience in the fashion sector, most recently as Chief Commercial Officer of Burberry, Gianluca brings a wealth of knowledge and expertise, including deep experience with the China market. I am thrilled to welcome him to the team. I will now talk through the quarter in the context of our strategies, starting with leading with our brand. Levi’s continues to boost its global cultural relevance and brand heat, with the brand growing 5% in the third quarter. Our growth is reflected in continued market share gains as we solidified our position as the number one women’s denim brand in the U.S, while maintaining our leadership in the men’s U.S. jeans category, in which we hold twice as much market share as our closest competitor. We also continue to gain share among high income consumers, supported by our efforts to elevate the brand. Our Levi’s women’s business remains robust, growing 11%, reflecting double-digit growth in both bottoms and tops. Earlier this week, we took another significant step in reaffirming Levi’s place at the center of culture through an unprecedented partnership with global icon Beyonce. The fully integrated global campaign titled Reimagined is on a scale unlike anything in our recent history. The first chapter of the campaign debuted on Monday with subsequent chapters that will run through 2025. The campaign features core products like 501 '90s, original Truckers and Essential T’s and pays homage to classic Levi’s ads through a modern reinterpretation focused on women and icons. We’ll be activating the campaign across more than 3,000 direct-to-consumer touch points and throughout our e-commerce channels around the world. We’re proud to see the celebration of two global icons come to life and look forward to connecting in new ways with our fans globally. Moving to product, where our pipeline is strong and improving. Let’s start with our core bottoms business. Overall, Levi’s bottoms grew 5% and 12% in DTC. As a denim leader, we continue to drive the category forward by leaning into our core, while consistently delivering product newness. There’s no better bellwether for the strength of our brand than the health of our iconic 501, which was up 11% in the quarter, with growth in both men’s and women’s. Loose and baggy denim continues to become a larger part of our bottoms portfolio. We remain at the forefront of this trend with loose fits up 15% in the quarter, reflecting strength across genders and channels. And through the launch of the 555 for him and the XL for her, we continue to inject newness into the looser fit trend. Our overarching strategy is to expand from being a denim bottoms brand to becoming a head-to-toe denim lifestyle brand. That starts with owning denim dressing, which includes denim skirts, denim dresses, western tops, denim jumpsuits and more. For the third consecutive quarter, we saw triple-digit growth in dresses and skirts, the vast majority of which was denim. We’re pleased with the ongoing traction in our Levi’s tops business, as revenue increased 8% for the quarter and 15% in DTC. Women’s tops performed exceptionally well, up 12% and 21% in DTC, driven by positive performance in truckers, wovens and non-graphic Ts. All these contributed to women’s being up 11% overall and women’s DTC up 18%. Levi’s men’s tops were up 5%, fueled by DTC up 12%, with strength in wovens and outerwear in addition to newness in polos and sweaters. The Levi’s men’s business grew low single-digits overall and 9% in DTC this quarter, as we continue to respond to shifting preferences towards more comfort and versatility in his closet. We are focused on delivering innovative fabrics and fits through innovations like performance cool, which was up quadruple-digits in the quarter. And, our recently launched non-denim performance tech series reflects the range we’re able to offer our consumer, helping to drive 29% growth in Levi’s men’s non-denim bottoms for the quarter. Looking forward to the holiday season, we’re doubling down on our winning strategies, including denim dressing, fashion fits like loose and baggy for men and women, and our tops expansion, including a denim inspired outerwear collection in time for cooler weather. We’re excited to deliver a robust pipeline of newness to our fans as we enter the holiday season and into 2025. Now shifting to DTC-first. Our global direct-to-consumer business delivered another strong quarter of performance, up 12% on top of 13% growth in the prior year, driven by positive comp sales for the 10th consecutive quarter. Our growth was led by U.S. DTC, which was up 12%, again driven by strong performance in brick-and-mortar retail. AURs in our U.S. mainline business were up high single-digits as consumers continue to gravitate toward our full price premium products. We continue to raise the bar on running high performing stores and are encouraged by the strong store KPIs across our portfolio, including increased traffic, higher conversion and improved AURs. These healthy metrics reflect consumers’ positive response to both our product innovation and newness as well as improved in stocks. E-commerce continues to outperform, up 18%, reflecting strength across all segments supported by increases in traffic, UPT and AUR. Ongoing initiatives to elevate our site and deliver a more premium expanded online assortment are enhancing the consumer experience. We’re seeing encouraging trends in consumer engagement with our Global Loyalty Program acquiring nearly 2 million new members in Q3, bringing our total member base to 37 million globally. Shifting to global wholesale. While this channel is seeing sequential improvement from down 6% in H1 to down 3% in Q3, excluding Denizen, it continued to be a headwind to our overall revenue growth. We are focused on ensuring this is a healthy, profitable business, and this strategic focus is evident in the channel’s gross margin increasing more than 500 basis points over prior year. In U.S. wholesale, the Levi’s brand was down 2%. Levi’s women’s was again a bright spot, up low single-digits in the quarter, including 4% growth in tops. We are encouraged by the return of Europe wholesale to growth, up 4%, driven by strong demand for newness. And our forward wholesale order book in Europe continues to be positive in Q4. We continue to feel good about the trends we’re seeing in our global wholesale business overall. Sellout trends are improving, including in the U.S. and Europe, and customers are excited about our expanded assortments. Turning now to our third strategy, powering the portfolio. Growing our business outside the U.S. remains one of our largest opportunities, and our international business grew 5% in the quarter. Importantly, Europe inflected to growth up 7%, including mid-single-digit growth in Wholesale and 10% growth in DTC. Beyond Yoga was up 19%, an acceleration from Q2, driven by strength in wholesale and e-commerce. Under Nancy Green’s leadership, we have reset the Beyond Yoga strategy to drive more disciplined growth and profitability. Despite the impairment charge we took, which Harmit will share more about, we are confident in this brand based on the strategic direction Nancy and her team has laid out, and remain committed to fulfilling its long-term potential. In closing, if you walk away from today’s call with one thought, let it be that we’re confident that we have the right strategies to fuel long-term profitable growth. The core of our business, the Levi’s brand, remains strong, and we are accelerating growth across categories, channels and the globe. Finally, I’d like to thank our incredible, talented and passionate team around the world that is delivering outstanding service to our fans every day. And with that, I will now turn it over to Harmit, to provide more color on our financial performance and outlook.

Thank you, Michelle. I want to start by emphasizing the confidence I have in our improved profitability and cash flows. In quarter three, we delivered significant margin expansion with adjusted EBIT dollars increasing 27% and adjusted EBIT margins leveraging 250 basis points. This improvement drove double-digit adjusted diluted EPS growth despite a $0.05 headwind from tax while maintaining expense and inventory discipline and generating much higher cash flow through the first nine months of 2024. While the top line came in on the low-end of our guidance, we are encouraged by the acceleration of the Levi’s brand globally contributing to our ability to exceed our profitability targets. Other key factors driving our profitability improvement include the increase in Americas profitability driven by strength in gross margin. Our business in Europe, our highest margin market returned to growth and continued improvement in the profitability of our direct-to-consumer channel where we generated more than 350 basis points of operating margin expansion this quarter. On a year-to-date basis, this improved the DTC margins by 270 basis points versus last year. This combined with our continued focus on keeping inventories clean and maintaining discipline in promotional levels allowed us to grow gross profit dollars approximately two times faster than adjusted SG&A dollars in quarter three resulting in higher flow through of every incremental dollar of revenue. We expect this trend to further improve in quarter four. Also as we announced today, we are reviewing strategic alternatives for Dockers. This decision highlights our capital allocation discipline and will help us continue to become a more focused faster growing higher margin business with a portfolio of brands that have a long runway of profitable growth. We are working with external advisors to identify the right path forward that we believe will enable LS & Co. and Dockers to reach their maximum potential and value as independent businesses. And, as we look into the fourth quarter, we expect the continuation of sequential revenue and profitability growth we have experienced this year. In quarter three versus H1 ‘24, revenues accelerated two percentage points and adjusted EBIT margin expanded four percentage points. As we head into Q4, topline growth progression will be fueled by strong momentum of the Levi’s brand as well as DTC, wholesale and Europe. Profit growth progression will be driven by the acceleration of revenue and project fuel savings. I will share more when I cover the outlook. And with that, I will turn to our results. Quarter three net revenues were $1.5 billion up 3% excluding Denizen. The drivers of the revenue growth were Levi’s and Beyond Yoga contributing approximately five percentage points of growth partially offset by approximately two percentage points of decline from Signature and Dockers. While Signature declined in the quarter, it was largely a timing issue and we expect it to return to growth in quarter four. Gross profit for the third quarter was $911 million or 60% of net revenues, our record quarter three gross margin. Our gross margin increased 440 basis points relative to last year driven primarily by lower product costs, the continued shift to DTC and higher full price sales. These factors offset approximately 60 basis points of FX headwinds and higher airfreight as we chase into new products to meet demand. Adjusted SG&A expenses in the quarter increased 5% to $735 million and as a percentage of net revenues adjusted SG&A was 48.5%, up 210 basis points from last year. The increase in adjusted SG&A dollars was primarily related to higher DTC expenses and advertising versus last year as well as an increase in distribution expenses related to the short-term process of running a parallel distribution center in the U.S. We have contracted with Maersk in the U.S. and GXO in Europe as third-party logistic providers and the process of transfer and the change from owned to third-party is progressing well. Gross profit dollars increased by 8% and grew at approximately twice the pace of adjusted SG&A dollars leading to EBIT leverage with adjusted EBIT margin increasing 250 basis points to 11.6%. Adjusted EBIT dollars also grew significantly up 27% versus last year. Our efficiency efforts as part of Project Fuel played a key role in this outcome resulting in savings throughout our P&L. Approximately $30 million in savings this quarter helped to offset continued investments in our DTC expansion and incremental A&P to continue to fuel our growth. We are well-positioned to deliver our $100 million savings target in ‘24 with line-of-sight to even more opportunity beyond that. Adjusted diluted EPS was $0.33 up 18% to prior year despite a higher tax rate. Our adjusted diluted EPS excludes $111 million non-cash charge related to the impairment of the Beyond Yoga goodwill and intangible assets in conjunction with our annual testing. The impairment was due to investing in the brand’s new strategic plan for growth and expansion. The business continues to perform well up 19% in quarter three and 14% year-to-date. Reported inventory dollars were down 7%. The composition of our inventory is healthy and we expect to end the year with inventory lower than prior year. Turning to dividend and share repurchases. In the quarter, we returned $69 million to shareholders which includes $52 million in dividends and $18 million in share repurchases. Since we restarted share repurchases in Q1, we have returned 37% more capital to shareholders versus prior year. And for quarter four ‘24, we have declared a dividend of $0.13 per share in-line with quarter three. Now, let’s review the key highlights by segment. The Americas were up 2% adjusting for the exit of the Denizen business. Direct-to-consumer revenues were up 16% driven by double-digit growth in brick-and-mortar and e-commerce. Gross margin outperformed due to favorable product costs and mix. Higher food prices also contributed to the strong operating margin of 23% up 530 basis points to prior year. Europe returned to growth this quarter up 7% reflecting growth across both channels. We saw an acceleration in DTC growth from quarter two up 10% most notably in e-commerce increasing 30%. Wholesale returned to growth this quarter up 4%. The women’s business was up double-digits with growth in both channels as fashion fits and newness are resonating with the European consumer. In the quarter, strong gross margin expansion resulted in an operating margin of 20.5% up 280 basis points to prior year. Asia net revenues increased 4% compared to the prior year and were up 22% on a two year stack. Direct-to-consumer revenues increased 6% driven by strength in both company operated stores and e-commerce in addition to wholesale revenues which were up 1%. While we saw significant strength in many markets including Turkey and Japan, headwinds persisted in our China and Middle East businesses. Asia delivered operating margin of 12% which was flat to last year. Now, let’s turn to our outlook. We are confident that the acceleration in sales in Q3 will continue into Q4. This will be driven by accelerated growth of the Levi’s brand supported by a new marketing campaign, improving in global wholesale and continued momentum in DTC and Europe along with the benefit from the 53rd week. However, our prior full-year expectations are being offset by headwinds in China, Dockers and Mexico wholesale. As a result of these headwinds, we are expecting mid-single-digit revenue growth for the fourth quarter and for the year we are adjusting reported revenues from the low-end of our 1% to 3% guidance to 1% and constant currency from the high-end of our previously guided range to 1.5% to 2%. I’m confident in our plans to address these areas and while we recognize that the benefits from these actions will take time to fully materialize, we are beginning to see improvements as we step into Q4. As I referenced earlier, we are also confident in our expectation of progressive margin expansion. We are increasing our full-year gross margin expectation from 180 basis points to 270 basis points driven by the quarter three beat and a higher contribution from DTC in quarter four. Full-year SG&A is expected to be up 4% compared to prior year with the acceleration in Q4 attributable to the 53rd week and higher advertising expenses. The increase in SG&A will be partially mitigated by Project Fuel savings which are expected to be around $50 million. Overall SG&A as a percent to revenue has come down as the year has progressed. We expect gross profit dollar flow through to be higher than SG&A dollars in quarter four driving Q4 EBIT margin to be in the low-teens. We continue to expect full-year EBIT margin to be slightly above 10% leveraging approximately 100 to 130 basis points versus last year. We now expect full-year interest expense to be around $50 million for the year with $13 million anticipated for quarter four. Our Q4 tax rate is projected to be in the mid-teens. We now expect full-year adjusted EPS to be at the midpoint of $1.17 to $1.27 guidance range. We also remain on-track to open 100 net new system doors for the year. In summary, here are the key takeaways from my discussion today. First, we are seeing meaningful positive momentum of the Levi’s brand globally which will accelerate in Q4 fueled by a new Beyonce campaign and product innovation. Second, we are narrowing our focus to Levi’s and Beyond Yoga which will drive higher growth and margins. This includes the actions we have taken to evaluate strategic alternatives for the Dockers brand along with our decision to exit Denizen and our footwear business earlier this year. Third, our focus on improving profitability and the structural economics of the business through driving higher gross profit less SG&A positions us well for the long-term and furthers us on our path to achieve 15% operating margins over the longer-term. And fourth, we believe we are exiting the year in a much stronger position than at the beginning as evidenced by the sequential progression in revenue and profitability across both channels and strength across key geographies the U.S. and Europe. And, with that let’s go ahead and open up the line for Q&A.

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Bob Drbul of Guggenheim. Sir, your line is open.

Hi. Good afternoon. Two questions for you, if I could sneak them in. Aida, please forgive me. The first one is for Harmit. Can you talk a bit more just around the drivers of this quarter’s revenue miss and your confidence in the Q4 acceleration? And then for Michelle, can you just expand a bit more just on the rationale on the Dockers evaluation and just the timing of it, I guess, if you could just spend answer those, those would be great.

Thanks, Bob. Let me take the first and Michelle can take the Dockers piece. Both were expected questions, so thanks for asking. Just going back and looking at the quarter, as we said, we did come in the low end of our guidance in terms of revenue, but we did exceed our profitability expectations. What drove the difference between coming in the low end versus coming at the top end? Basically four factors, I’d say a fourth of the difference or the miss was driven by foreign exchange, largely Mexico peso, with the dollar. The remaining three-fourth was driven by what Michelle and I referred to in the script, which is lower performance from Mexico, particularly Mexico wholesale, part driven by the cybersecurity breach, which we’re working very closely with the largest customer. So, we can get the shipping back to normal standards. Part China, which is a combination of the macro headwind, China as you all know is a small piece of our business, but it was impacted and the other piece was Dockers underperforming. So, those are the factors that drove the miss. To your question about, why we feel quarter four will continue to accelerate. So, quarter three has accelerated from H1 both in revenue and profitability. We continue to believe quarter four continues the acceleration. We think top line grows at about mid-single digit and EBIT margin in the low teens. But the factors that drive or give us confidence about the about quarter four. First, we’re beginning the quarter for much stronger than we exited quarter three, which is a good sign. Second, we’re confident about the continued strength in the U.S. and Europe. Europe closed quarter three slightly stronger than we expected, which was good news. The second is, we do believe the global wholesale, which has sequentially improved, it was still down in quarter three, but sequentially better than the first half will continue to improve. And our momentum in our direct to consumer business, which is not only stronger, but also a lot more profitable continues into quarter four. We are also seeing the new product assortments are being accepted by the consumer. In fact, we’re chasing into some of our products as we get ready for the holiday season and the partnership with Beyonce, I think will fuel the momentum. And then there is the 53rd week, which net of Denizen is expected to add 1.5 to 2 percentage points. I think the important fact for all of you to think through is how are we exiting the year and our belief is we are exiting the year in a much stronger position both in terms of revenue growth and profitably than we began the year. Structurally, the U.S. Levi’s wholesale business is expected to end the year less than 20%. Yes, let me repeat that, less than 20% of our total business and is down from 30% in 2015. And that combined with the strength of DTC both on the top line and the bottom line, I think structurally allows us to enter 2025 in a much stronger position. I hope that answers your question. I’ll now defer to Michelle on Dockers.

Yes, great. Bob, thanks for the question. In terms of our decision to explore strategic options for Dockers, this is all about focus. And our intention going forward is to really amplify our focus on the Levi’s brand and accelerate Beyond Yoga. In terms of Dockers, this business has underperformed for some time. And so as we announced, we’re going to look at alternatives with an intention to sell this business. We have you’ve seen us throughout the year take decisive action on a number of fronts. We exited our European footwear business, exited the Denizen brand. We’ve evolved their distribution and logistics strategy. So, this is the next and frankly the biggest decision we’ve made to really position the business for the long-term. We believe it’s going to be good for the top line as we accelerate both Levi’s and Beyond Yoga. It will also be good from a margin standpoint in terms of our overall margin structure. And I would say given that even this quarter, the Levi’s brand was up 5%, Dockers down 13%, we also believe going forward it’s going to create kind of more consistent growth and minimize volatility. We have started the process. We’ve engaged Bank of America. And to your question on timing, you can just look forward to getting more updates as we have them.

Great. Thank you very much.

Thanks, Bob.

Thank you. Our next question comes from Matthew Boss of JPMorgan.

Great. Thanks. So, Michelle, could you elaborate on the 5% global growth for the Levi’s brand? Maybe how that compares to the overall denim category and market share trends that you’re seeing by region? And then Harmit, multi-year, any change to the 30 to 40 basis points of annual gross margin expansion as an algorithm?

Thanks, Matt. I’ll kick it off in terms of the 5% growth and what that means in the context of the consumer and category. So in terms of the 5% growth for Levi’s, clearly, that’s being driven by the strength of direct-to-consumer, which was up 12%, globally 12% here in the U.S. and we’re seeing that as it relates to direct-to-consumer, we’re seeing that in our stores. Now I think 10 quarters of consecutive growth, new store openings are on track, 100 net new stores for the year. And then our e-commerce business is also accelerating, up almost 20%. So that’s really fueling the growth. In terms of Wholesale, which continues to be an important part of our business, while still a headwind and still negative, it was down 3% globally. We are seeing that sequentially improve. And we expect, collectively, the Levi’s brand in the business to sequentially improve into the fourth quarter. Harmit spoke to that just now. We’ve got a lot of levers that are going to drive that growth. I think when you also look kind of inside the makeup of the business, we continue to be really pleased with the acceleration of our Women’s business. Our Women’s business both outperformed in DTC and in wholesale, and we expect that to continue. We’re seeing growth in the bottoms business for women’s. We’re seeing growth, and frankly, men’s overall for Levi’s was also positive, so strength in bottoms and also strength in the tops business. I mean, tops was up 8% for the quarter across both channels, up even higher in DTC. So, when we talk about the pivot to really become a head to toe lifestyle apparel company, we’re seeing those proof points, which also over time expands our addressable market. So, those are highlights around the strength of the Levi’s brand and business. And as Harmit just said and I’ll echo, we expect this to continue in the fourth quarter and the quarter has started off strong in September. So, we feel good about that, but we don’t want to get ahead of ourselves, hence, the guide as it is. I’d say from a consumer standpoint, generally, we’re feeling good about the consumer, but we also recognize that we continue to operate in an uncertain environment. We’re optimistic on the category long term. You asked about the geographies. The momentum in the U.S. continues another quarter of positive growth. Europe inflected to growth, up 7%. And of course, Asia as a whole was up 4%. And in terms of the U.S, that consumer is proving to be resilient. And you see that in our DTC numbers, up 12% as I was just talking about. As it relates to market share, again, I’d say we’re pleased. Women’s has been a focus, just sharing the numbers overall, and Women’s continues to gain market share and is now solidly in the number one position, which hasn’t been the case historically. We’ve shared over the last year, we’ve continued to gain market share. And now, like I said, we are very solidly in that number one position, which complements men’s being the number one market share leader. And we are 2x versus the next closest competitor. So, we feel very good about what’s happening in the business and how we’re driving share.

On your second question, Matt, going back to the growth algorithm, let me start by just reinforcing something that you’ve heard me now say for a couple of quarters, we’ve got this laser focus on growing gross profit dollars faster than SG&A. And what it really does is increases the flow through for every incremental dollar revenue that we add to our business. We’ve seen the progress across the board and I think that is the one metric that will really help us get to the 15% operating margin that we are talking about. Your specific question about gross margin, I think structurally, what we have said, which is a 30 to 40 basis points of gross margin that we’ll add every year. I think that doesn’t change and I would say that’s part of the course. Where we really focused to try and accelerate that is on a couple of things. As we drive a higher direct-to-consumer business that could be a little better. The other thing is we are focused on driving higher full price sales, especially in our direct-to-consumer business and that’s going to really be driven by the innovation that’s happening on a product pipeline that’s hitting home, we’re chasing into product and we believe that continues. So, that makes a big difference. And then as we simplify our go-to-market calendar, we’re really looking at how do we get more agile in how we actually source product and that should have some benefit in cost of goods sales over time. We’ll talk more about this as we guide 2025 and beyond, but, I’d tell you take the 30 to 40 basis points right now and then more to come. Stay tuned for further acceleration in the next couple of quarters.

Thank you. Our next question comes from the line of Oliver Chen of TD Cowen.

Hi. Thanks, Michelle and Harmit. DTC and women’s were impressive. What’s happening with men? And also, as you think about your longer term revenue growth algorithm of plus 6 to 8, what are the building blocks to getting there more sustainably? It sounds like there could be an innovation opportunity in men’s and then wholesale is obviously not growing as fast as DTC. The other opportunity/question is like faster inventory turns on your direct-to-consumer and ways to enhance that over time perhaps using the cost method of accounting. And East Coast port is on people’s minds as well. Thanks.

Yes. Great. Hi, Oliver. Thanks for the question. So, yes, I mean happy about our DTC business. Clearly, women’s accelerating. But to your point, men’s is a critical part of our business and very important. We have a lot of focus. I mean, while we’ve continued to talk about our win with women strategy is that we are underdeveloped in that business, right? And that business over time should be at least half, and we’re about 35% or so today. So, we have a lot of upside, but with men, we must retain our top position and continue to grow there. So, for the quarter, just to add a little bit more color on the men’s business, men’s did accelerate from the first half. Men’s was positive for Levi’s, up 2%, up high single-digits in DTC. But we see more opportunity. We’re not satisfied there. We do want to accelerate growth. And so we are focused both on energizing the core of our business. 501 continues to perform. What more can we do there? And importantly, on the, call it, evolution of fits for men, baggy and loose is now really taking hold and we’ve been chasing those fits for men. And we are going to be in a better in stock position in the fourth quarter given the moves that our merchandising and planning team did versus Q3. I think there were some missed opportunity on the baggy and loose say for men in the third quarter, but we’ve got that covered for the fourth quarter. And then over time for men, it kind of goes back to what we’re talking about earlier on this head to toe denim lifestyle, both in terms of when you think about bottoms, yes, it’s denim, but also non-denim. And non-denim bottoms for us now make up about 40% of our business. We’re seeing traction in products like the Xx Chino, which continues to perform. We just introduced the Sheer, as you’re aware, the Tech pant, which is more of a performance oriented, but still very Levi’s. And then innovation in fabrics, performance cool, warm, comfortable, stretchy and again on the loose trend, the 555 introducing as we speak. The tops opportunity, continued like it is for women, continues to be an opportunity for men’s, and we’re also seeing traction there. I mean, combined men’s and women’s for tops, we were up 8% in total globally, all channels, and then even greater for DTC. And to your point, this is a focus for us both for our direct-to-consumer but also for wholesale. It’s DTC first as it relates to the overall strategy, that’s where a lot of our future growth is going to come, but also ensuring that our wholesale channel remains healthy and we are seeing sequential improvement there. And as you know, the men’s business particularly penetrates in that wholesale channel. So again, we talked about as we head into Q4, we’re expecting acceleration overall and that would carry for both the men’s and women’s business.

To your other two questions, Oliver, inventory, I’ll do a speed answer on both. Inventory turns about 2, our long-term goal is 3, we’re committed to it and lock substantial amount of working capital and cash. The tailwinds that we are working on or the areas we’re working on, a faster go-to-market calendar, we’re reducing our SKU’s and Dockers exit should actually help because Dockers inventory turn is lower. I think the one thing that we just have to that we need and I think everybody needs, all retailers need is a little bit more consistency in some of the supply chain issues we’ve had. And I’ll talk about the latest one that you referred to, which is the port issue. But just getting more consistency clarity, I think will really make a big difference because all of us have a little bit more safety stock right now. And in our case, we are chasing the new stuff. So, we will probably buy more of the new stuff just to make sure that we don’t lose sales. But I think those are the things we’re working on. On the port strike, it’s a developing situation. We are doing everything we can to prepare ourselves as much as we can. We’ve been working on this for the last couple of months. But like everyone else, the impact on us will depend on how long it goes on for. Knowing that this was on the horizon, we’ve been proactively working on it through as early as March and we’ve been monitoring the situation closely. We have for example, proactively shifted routes to the West Coast. We have prioritized certain POs and switched to airfreight just to ensure that we have the product for the holiday season etcetera, etcetera. And so our hope like everyone else is that this gets resolved quickly.

Thanks, Michelle. Thanks, Harmit. Best regards. Happy holidays.

Thank you. You too as well.

You too.

Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo.

Hi, good afternoon everyone. Maybe Harmit or Michelle, just can you elaborate a little bit more on U.S. wholesale, the weakness that was in the quarter, was that in line with your expectation? What is your expectation based on, what you’re seeing so far for the fourth quarter? And kind of just trying to get a maybe just a state of the union on that channel, how are you thinking about it, macro and then your own execution would be great. Thanks.

Sure. I’m happy to take that. I would say for the Levi’s brand, for U.S. wholesale that largely came in line with our expectations. We’ve talked about Dockers not meeting our expectations and that was true very much in the wholesale channel. As I spoke to kind of earlier, global wholesale was down 3%, up from the first half. And then in the U.S, also sequentially improved, down 2%. I will add that a bright spot not only for the total company, but also in U.S. wholesale and global wholesale frankly was the women’s business. So, women’s was up 4% globally and up 2% in U.S. wholesale and that’s been driven by -- driving the Fashion Fits, the baggy trend and also this head to toe denim dressing including tops. We are getting traction in tops with our wholesale business. I would add that while this continues to be a headwind to sales, again DTC up 12%, wholesale down 3%, U.S. wholesale down 2%, we are seeing, like I said, a sequential improvement. We expect that sequential improvement to carry into Q4 and beyond. I’d also add that the profitability of the channel is improving. We saw 500 basis points of gross margin leverage in this quarter and part of that candidly has been, frankly, focused on more full price selling. That also impacted the top line a little bit. All was accounted for in U.S. wholesale but having less off price sales as an example as we focus on full price selling. So, I’ll just say important channel, our key customers are really important to us and we’re important to them. And I think the big unlock for us going forward is really making sure that we get great adoption of the new products we’re offering. Sometimes we have a broader, bigger assortment of like fashion fits and DTC and we see that flow through. So how can we get wholesale to adopt those more quickly? And we are beginning to see the whole head to toe lifestyle, including tops. And some of our key customers are really adopting that. So, I think these things carry in to build our momentum into the fourth quarter and beyond.

Great. Thanks.

Great. Thanks, Ike.

Thanks, Ike.

Thank you. Our next question comes from the line of Brooke Roach of Goldman Sachs.

Good afternoon and thank you for taking our question. Harmit, I was hoping you could quantify the drivers of gross margin outperformance in the quarter versus your prior outlook, which I believe was for 200 basis points of expansion. And then looking ahead, how should we be thinking about the puts and takes on gross margin? What level of cost recapture is still on the horizon? How are you thinking about pricing and promotions? And what are the offsets that you’re currently embedding in your outlook from freight and supply chain disruption? Thank you.

Sure, Brooke. So, the big buckets, in terms of what drove this, so gross margin higher than we expected clearly by 200 plus basis points. But relative to a year ago, I think if you break up the 440, I would say 270 basis points was product costs, that helped, 50 basis points were higher full price sales. Let me put this extra effort, especially as I mentioned earlier, the products that we are now bringing to market are hitting home and we’re chasing into it. And then 190 odd basis points from brand and channel mix. We had a few offsets, 60 basis points from FX and airfreight and airfreight is largely because we’re chasing into product. So that is one walk, which is from a year ago relative to what we thought, is really coming an extra point from channel mix, which is DTC is strong, Europe had a strong DTC quarter, about half a point from higher full price sales is always difficult to predict the teams on the ground and our e-commerce folks are doing a great job improving that. We are still -- we have opportunity and so there’s more to come and a point due to lower COGS, sometimes difficult to predict. So, that’s how we’re thinking of gross -- that’s what really drove gross margins for the quarter. For quarter four, I think much of the same. And that’s why as we think about the year, we’ll probably end the year 200 plus basis points, no, actually 300 closer to 270 to 300 basis points better than a year ago. And that’s really driven by the same factors. FX a headwind, product cost a tailwind, mix a tailwind and higher full price sales.

Great. Thanks so much.

You’re welcome.

Thank you. The next question comes from the line of Jay Sole of UBS.

Great. Thank you. Michelle, if you just take a step back for a second, you think about everything that the company is doing to try to transform into a global DTC business versus what was traditionally a wholesale business. How far along is the company in that journey? I mean, how much more to be skills does the company have to acquire, people and talent does the company have to add? Where would you say the company is in that journey?

Yes. Thanks, Jay, for the question. It’s a great question. I mean, I would say, first of all, I’d say we’re still in the early stages. But that said, we’re making rapid progress. And I think this year, in particular, where we have an initiative called Project Fuel, which is our global productivity initiative, but it’s not just about the bottom line, it’s also about the top line, how we accelerate growth and do that more profitably to reach our ambitions about turning this company into a 10 billion more profitable company. We’ve brought in a number of new leaders, who have DTC skills. I mean, [Jason Gallins] (ph), who came out of Nordstrom, he has deep, deep expertise in e-commerce and candidly, you’re seeing that play out with the acceleration of our e-comm business and digital overall. Gianluca Flore just joined us, who comes from over 20 years of deep retail experience. And we are very much in the work of, call it, rewiring the company, which is, Harmit alluded to it, but our go-to-market, we now do see how we are going to take several months out of our process to get down to a 12 month calendar. And in some cases, our speed lanes will be a lot faster. So that is one example. The other piece I would point to is it’s no accident that we’re seeing DTC overall accelerate and the profitability increase. And we’ve taken actions through this Project Fuel to drive productivity, and we’re seeing that payout. We have a 100 plus stores in pilot where we’re addressing selling skills, driving UPT. All of our metrics, as I remarked earlier, are actually showing positive growth. Things like conversion and units per transaction, which is all on the back of like being an expert in retail, coupled with driving more profitability out of the boxes. And we’re seeing that through better labor deployment. So, there’s a lot to talk about here, but I would say this will be a multiyear journey, so it’s hard to put a percent, but I’d say we’re making great progress, and I think that progress has accelerated in the last 12 months.

Got it. Thank you so much.

Thanks for the question.

Thank you. Our next question comes from the line of Laurent Vasilescu of BNP Paribas.

Good afternoon. Thank you very much for taking my question. Michelle, I think you mentioned European wholesale was up 4%, if I recall. If that’s the case, can you maybe talk about what you’re seeing for potentially for the fourth quarter? And I recognize you’re not going to talk about fiscal year ‘25, but are there indications that would potentially continue into spring of next year? And then, I think, Harmit, you talked about some timing shifts, whether it was Mexico. I don’t know if you can quantify how much revenues fell in from 3Q into 4Q as we think about the top line for 3Q?

Yes. So great. Thanks for the question. In terms of Europe, yes, we were very pleased to see Europe influx to growth 7% overall, strength in both channels. And as you pointed out, 4% growth in wholesale, 10% in DTC. That’s been a lot around the new product innovation we’re seeing across both genders. We’re especially seeing acceleration with women’s. A lot of our key customers, wholesale in Europe, have been quick to adopt this head to toe denim lifestyle, more tops, more skirts, more dresses, and they’re working. So, we’re anticipating that Europe exactly how that plays out. Stay tuned. Everything we know is baked into our guidance. And surely, as we look to the next year and beyond, we think this is the start of a really positive trend for Europe. We have a great leadership team there. Our pre book, since you asked about wholesale, our pre book does continue to be positive. That was one of the factors that contributed to Q3. So, all in all, we feel like we’re very well positioned in that market.

Yes. And Laurent, to your question, while Mexico underperformed because of the one of the reasons was the cyber security and our constraint into ship. The reason I won’t quantify it, it is a little bit -- the reason I won’t quantify is because we’re working through that with our largest customer. And these things because they have technology implications take a little time, but we’re working through it. We feel good about the fact that the business generally the brand and the business is healthy and it’s a matter of timing. So more to come, but the reason I’m not giving you a clear answer is because we just need another quarter for this to improve and the systems to start working both sides.

Thank you very much.

Thanks.

And with that, thanks everyone for joining the call and your questions and happy holidays. We’ll see you at the next call.