LEVI - NYSE

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Second Quarter Fiscal 2025 Earnings Conference Call for the period ending June 1, 2025. [Operator Instructions] 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 1 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 & Co.

Thank you for joining us on the call today to discuss the results for our second quarter fiscal 2025. Joining me on today's call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q2 financial results in 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 fiscal year ended December 1, 2024, and the MD&A section of our recently filed Form 10-Q 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, any additional U.S. tariffs or responsive non-U.S. tariffs and any future restructuring, restructuring-related severance and other charges. 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 organic net revenues or constant currency numbers, unless otherwise noted, and information provided is based on continuing operations. [Operator Instructions] And now I'd like to turn over the call to Michelle.

Thank you, and welcome, everyone, to today's call. I'm pleased to share that we delivered another standout quarter exceeding expectations across sales, margins and EPS. We saw broad-based revenue growth across channels and categories as well as strong margin expansion driven by the consistent execution of our strategic priorities. We arrived at the midpoint of 2025 in a strong position with the confidence to raise our top and bottom line outlook. Harmit will share more on our guidance later in the call. In Q2, we delivered another quarter of high single-digit organic net revenue growth, up 9%. Direct-to-consumer was up 10%, reflecting the 13th consecutive quarter of positive comparable sales growth with strong and increasing profitability across channels. Our wholesale business delivered another quarter of growth, up 7%. Our U.S. business maintained solid momentum up 7%, while international was up 10%, driven by outstanding results in Europe. And we continue to see strong performance in our core as well as outsized growth in our key focus areas like women's and tops. As we reach the midpoint of the year, I'd like to take a step back and reflect on the progress we've made transforming the business over the last 18 months. First, we've made significant strides in accelerating our shift toward becoming a DTC-first business across both brick-and-mortar and e-commerce. Today, our owned and operated channels represent over half of our business, and they continue to deliver consistent, healthy comps alongside improving profitability. This progress reflects our disciplined shift toward becoming a truly consumer-led DTC-first retailer. Second, we are making measurable progress in our evolution from a denim bottoms business to a full head-to-toe apparel lifestyle brand. While maintaining our dominance in jeans, we continue to drive outsized growth in lifestyle categories, including tops, dresses, outerwear and non-denim bottoms. Importantly, we've expanded our assortment with greater discipline, rationalizing SKUs and introducing newness that is delivering stronger productivity and higher full price sell-through. These choices are key drivers of our sustained market leadership and rising AUR. Third, we're narrowing our focus. As shared in May, we announced the sale of Dockers, which followed our decision to exit our Denizen and footwear businesses. These bold strategic choices are enabling us to deliberately distort focus to the Levi's brand, putting brand equity, consumer connection and category leadership at the center of every decision. Fourth, underpinning this transformation is a sharpened ability to operate with rigor and execute with excellence. From go-to-market acceleration and streamlining store operations to end-to-end supply chain efficiencies, we are rewiring how we work, embedding structure, discipline and cross-function alignment at scale. These foundational shifts are unlocking growth, enhancing profitability and enabling us to better serve our fans as we make progress toward becoming a $10 billion company. While the global operating environment has become more challenging with uncertainty around tariffs and broader consumer behavior, we are navigating this period from a position of strength. I'll now walk you through highlights from the quarter in the context of our strategy. Note that all numbers that Harmit and I will reference are on an organic, continuing operations basis. Let's start with our first strategy, being brand-led. The Levi's brand continues to resonate with fans around the world, growing 9% overall with 6% growth in men's and 14% in women's. Our unaided brand awareness and consideration remains best-in-class with our scores significantly increasing year-over-year in core markets across the globe. Our position as the most recognizable denim brand in the world is a powerful competitive advantage and a key indicator that our brand is stronger than ever. We continue to invest in the brand through global marketing initiatives and impactful activation, ensuring the Levi's brand remains at the center of culture. This quarter, we launched the third chapter of our REIIMAGINE campaign with Beyoncé, featuring a recreation of yet another classic marketing spot from our rich archive. We brought this partnership to fans globally through a limited edition product drop. And through our unique House of Strauss network, who worked directly with her team to create custom one-of-a-kind looks for her Cowboy Carter tour. Being front and center in music culture remains key to our marketing strategy. From the start of the music festival season, we've shown up in a major way from dressing Shaboozey at Stagecoach to hosting an incredible roster of influencers at Coachella. More recently, we were a leading sponsor for Primavera Sound in Barcelona, one of Europe's biggest festivals. With 3 Levi's dedicated stages, we outfitted influential pop icon Troye Sivan and offered an exclusive product collection. And to further drive brand heat, we continue to lean into the power of collaborations this quarter. After teasing at Paris Fashion Week last summer, we launched an Elevated collection with fashion house, Sacai, which sold at a premium price point and performed exceptionally well. Turning to product. Our evolution into a denim lifestyle brand is gaining momentum. We continue to lead the industry and deliver the best fit, fabric and innovation, striking the right balance between our authentic denim roots while infusing newness into the assortment. We're staying true to our denim heritage as we build out a compelling head-to-toe lifestyle assortment, and our amplified focus on women's and denim lifestyle is delivering outsized growth. We remain the unequivocal global leader in jeans. We are driving the trends today while setting the trends for tomorrow. Our Levi's bottoms business was up 8%, driven by double-digit growth in women's, and men's was up mid-single digits. While traditional fits like slim and straight-like styles remain a closet staple, loose and baggy continue to gain popularity for both women and men. Ahead of the summer, we saw this trend accelerate in our short offering, which grew double digits in both men's and women's. With the '90s and Y2K fashion in full swing, longer and looser style shorts are in high demand. We're confident we have the right newness and innovation like the Baggy Dad Jort in place to deliver for our fans and drive this trend. Earlier this year and ahead of the warmer months, we introduced an expanded line of lightweight look, including our Linen Plus Denim collection to appeal to our fans interest in lighter, softer and more comfortable styles. We've infused these new fabric innovations across our assortment from dresses, rompers, jeans and truckers to sweaters, wovens and polos. We've seen strong success across both men and women, and we'll continue to fuel this trend throughout the year as more consumers look for lighterweight offerings year round. Another notable style trend gaining momentum is what we're calling quiet western, an evolution of the full Western theme we saw take off last year but with a more subtle twist. With our robust denim lifestyle offering, we're seeing consumers find that perfect pairing more and more often. Women are pairing a classic blue cut or flared jean with our simple essential rib tank or one of our textured knits inspired from our heritage. And men are wearing a classic Western shirt with a Khaki XX Chino. Quiet western is perfect for the Levi's denim lifestyle aesthetic and a natural place for us to lead. Last year, we reset our tops business, and that work is truly taking hold and propelling our evolution into denim lifestyle. This included bringing in new talent, new vendors and new capabilities, including a new top agility function on a shorter go-to-market cycle, which enables a more responsive and on-trend assortment in tops and graphic tees focused on our DTC channels. Energized by this new capability, along with an elevated assortment overall, our tops business grew 16% this quarter with acceleration across genders and channels. Looking ahead, we have everything in place to continue the momentum we've experienced this year, a fresh lineup of product innovation, unique and exclusive product collaborations and globally relevant partnerships. We have a number of great marketing activities planned for H2, including continuing to fuel our women's business with the launch of an additional chapter of REIIMAGINE, and the introduction of a new campaign focused on underscoring our relevancy and authenticity with men. And you can expect to see the Levi's brand come to life with more exciting and innovative collaborations like our highly anticipated Levi's and NIKE collab, which just dropped. For products, we're bringing even more fit and fabric innovation to excite our fans in the second half of the year. We're expanding our diversified fit portfolio to drive the loose and baggy trend while also introducing freshness in skinny and straight silhouette. As the quiet Western aesthetic takes hold, we're leaning into bootcut and Western inspired fit to fuel this evolving style. And for our iconic 501, we're launching a breakthrough performance fabric with thermo-regulating technology, bringing year-round comfort denim to a closet staple. Now shifting to our strategy to be DTC-first. Our global direct-to-consumer performance this quarter was up 10% with another quarter of very solid positive comps. Our strong performance came from increased store traffic, better conversion rates and higher AURs, leading to growth both in stores and online across all geographic segments. As we have shared the past several quarters, we have been focused not only on driving DTC growth but doing it in a healthy and profitable way, and those efforts are paying off as DTC margins continue to improve meaningfully. We continue to enhance our front-of-house consumer experience and back-of-house efficiency, and we are driving full price sales as consumers gravitate to our new assortment. Our work is not yet done and we see opportunity for continued margin expansion in this channel. We also continue to expand our global store network, opening 16 net new doors this quarter. Store opening highlights include mainline locations in Nagoya, Japan, Seoul, Korea, and in the U.S. in New Jersey. These stores have been designed and built to better reflect our enhanced denim lifestyle offer. We drove another quarter of double-digit e-commerce growth, up 13% in Q2, with both traffic and AURs increasing as our efforts to elevate and improve the consumer experience on levi.com are gaining traction. Our loyalty program is another key connection point to our consumers, enabling us to engage more deliberately with our fans. We're increasingly using data and analytics to personalize loyalty member product offerings and experiences. And we're seeing members purchase more frequently and transact at a higher AUR than the balance of our consumer base. With close to 40 million members worldwide, this quarter, we expanded the program across several countries in Europe. And later this month, we're launching enhanced features for loyalty members in the U.S. Now turning to our third strategy, powering the portfolio. Our international business grew 10% in Q2, led by 15% growth in Europe. Last month, I had the opportunity to visit several of our key cities across Europe, including Paris, Barcelona, and Milan, some of the most fashion-forward cities in the world. I was blown away by how strong and relevant the Levi's brand is in the marketplace, both in stores and with consumers, especially young shoppers. Our team has been hard at work elevating how and where the brand shows up. And I'm constantly impressed by their commitment and dedication, which is another key driver in Europe's overall performance. We spent time with some of our key franchise partners who share our confidence with our growth prospects and are investing more behind our brands. We also met with key wholesale partners like

Thanks, Michelle. We had a strong finish to the first half of '25. In quarter 2, we delivered upside on sales, gross margins, SG&A, EBIT margin and EPS. We saw broad-based strength across DTC and wholesale, international and domestic, women's and men's, tops and bottoms, units and AURs. We were especially pleased to see DTC again lead our growth with comp sales up high single digits. Higher revenue productivity, coupled with better management of costs contributed to DTC EBIT margins increasing approximately 300 basis points in quarter 2 and approximately 400 basis points year-to-date. In addition, our wholesale channel accelerated to 7%-plus growth, posting its third consecutive quarter of growth while also experiencing improving margins. The continued inflection of our financial performance is a direct result of our laser focus on the core Levi's brand and our DTC-first strategy. We are fundamentally becoming a company with a higher growth rate, higher margin profile, stronger cash flows, higher returns on invested capital and a higher percentage of DTC. We arrive at the midpoint of 2025 in a very strong position with the confidence to raise our full year top and bottom line outlook. I will share more on our guidance for the balance of '25 later in the call. Now turning to a review of our results. Overall, we saw continued strength across the P&L. Net revenue grew 9%. This was our third consecutive quarter of high single-digit growth. Strength was broad-based as evidenced by the fact that DTC grew 10% and wholesale 7%, e-commerce grew 13% and brick-and-mortar 10%. International grew 10% and the U.S. 7%. Women's grew 13% and men's 6%. Tops grew 15% and bottoms 7%. And importantly, we generated a healthy mix of revenue growth with 2/3 driven by higher volume and 1/3 by higher AURs. In quarter 2, our global wholesale business again exceeded our expectations. The wholesale channel in Europe returned to growth this quarter as we completed the transition of our new distribution center. Looking forward, our order books remain positive for the balance of the year. In the U.S., Levi's wholesale grew 7%, reflecting continued strength in digital and premium accounts. Our wholesale partners are embracing our head-to-toe offerings, broader product assortment and fashion fits. Having a strong direct-to- consumer presence and focus gives us insights to product trends, enabling both us and our customers to have the confidence to buy and fill flows for our new product offers. Our 578 Baggy for men is an example of a product that performed exceptionally well in DTC and is now in expansion mode in wholesale for the second half of '25. And we have other new product offerings and expanded assortments, launching with customers in the U.S. this summer and as we head into fall. We're encouraged by our wholesale performance this year as the actions we have taken to stabilize this business are working. And while we continue to take a judicious approach to planning this business, we are raising our full year '25 projection for the wholesale channel to be between flat to now slightly positive. Gross margin for quarter 2 was a record 62.6% of net revenues, expanding 140 basis points versus last year. This was driven by lower product costs and favorable channel mix. We also continue to benefit from higher full price sales and lower promotion levels as we improve the life cycle management of our products, a key transformation initiative in our pivot to a DTC-first company. Adjusted SG&A expenses in the quarter were 54.4% of total net revenues. There was a 50 basis point rate improvement to prior year, mainly driven by leverage on higher sales. Distribution expenses increased versus prior year, given the ramp-up of our new DC in Europe and running parallel DCs in the U.S. The incremental distribution expenses associated with the consolidation of our DCs are temporary, and we expect the transition to be complete as we exit the year. We also just completed the sale of our Canton distribution center for which we received $22 million in cash in the quarter. Strategically, the transformation we are making to our DC network enables us to establish a more hybrid footprint, which will improve service levels and optimize distribution costs, supporting our evolution to a DTC-first denim lifestyle leader. Now back to the numbers. Driven by both gross margin expansion and SG&A leverage, we generated adjusted EBIT margin of 8.3%, up 190 basis points to prior year. Year-to-date, our EBIT margins are up 300 basis points to 10.9%, and the strong EBIT growth was a principal factor in delivering adjusted diluted EPS of $0.22, which was up 37% to prior year. Now let's review the key highlights by segment. The Americas net revenues were up 9% and the operating margin increased 270 basis points versus the prior year to 20.5%. We continued to see strong performance across both channels with DTC up 10% and wholesale up 8%. The U.S. business continued its strong performance and grew 7% with both DTC and wholesale up at similar levels. Our full price stores continue to perform exceptionally well with comp sales up high single digits, and as we look forward, we believe we can double our mainland store count over time. LatAm was up 18%, reflecting broad-based trends across the region, including double-digit growth in Mexico. Europe's net revenues were up 15% in quarter 2 and operating margin for this segment was 17.2%, up 210 basis points to prior year. We saw broad-based strength across markets, including double-digit growth in France, the U.K., Italy, and Spain. Momentum continued in the DTC channel, up 9%, driven by comp sales, reflecting strength across mainline, outlet, and e-commerce. And our wholesale business was up 23%, benefiting from the resumption of normalized shipping at our DC in Germany as well as strong performance from top customers. Year-to-date, our wholesale business in Europe is up 7%, and we continue to expect this channel to be positive for the balance of the year. Asia net revenues were flat to prior year as we took proactive actions to improve the structural economics of this business, including reducing sales to less profitable partners in India, taking back a portion of our franchisee business in Malaysia, and continuing to rationalize our franchisee base in China. As a result of these onetime actions, operating margins in the quarter contracted 150 basis points. We continue to see solid performance in DTC, which was up double digits. And several markets, including Japan, Turkey and South Africa experienced strong growth. Year-to-date, Asia grew 5% and EBIT margins were up 40 basis points to last year. We expect year-to-date trends to continue, and Asia remains on track to deliver mid-single-digit growth for the year. Turning to the balance sheet and cash flow. In the quarter, we generated free cash flow of $146 million and delivered a return on invested capital of 18%, up 4 points to prior year. We've also declared an 8% increase in the dividend to $0.14 per share, and we plan to return at least $100 million from net proceeds of the Dockers sale to shareholders in the form of share repurchases. We ended the quarter with reported inventory dollars up 15%. Approximately half the increase is to support sales through holiday, while the balance is mostly attributable to product brought in early to navigate the uncertain tariff impact, the disruption in the Red Sea and our market buybacks in Colombia and Malaysia. We expect to end the year with inventories roughly in line with revenue growth. Before turning to guidance, let me briefly address the topic of tariffs. After the announcement on April 2, our internal task force has focused on understanding the financial impacts of tariffs. We're also designing and implementing comprehensive actions to mitigate the impact. While the situation is still fluid, our guidance assumes an additional 30% tariff on goods arriving in the U.S. from China and an additional 10% tariff on U.S. imports from the rest of the world. Based on these assumptions, we estimate a gross impact before mitigation of approximately 50 basis points to our gross margin for 2025. After mitigation, we expect the net impact of tariffs to be about 20 basis points headwind to our full year gross margin or approximately a 40 basis point impact in the second half. This will result in a $0.02 to $0.03 impact to '25 adjusted diluted EPS split evenly between quarter 3 and quarter 4. Our key mitigation initiatives include promotion optimization, targeted pricing actions, vendor negotiations and further supply chain diversification. Looking beyond '25, should tariffs remain in place at these levels, given our transformation initiatives, which provides us multiple levers, we believe we are better positioned than most to manage through this uncertainty. Now I will turn to our outlook for the full year and quarter 3. As we look to the remainder of the year, we are closely monitoring the evolving tariff dynamics in addition to consumer confidence and behavior. Given the upside in the first half of the year, continued strong execution and momentum in our business, we are raising our top and bottom line guidance. For the full year, we have increased our expectations for organic net revenue growth by 1 percentage point to 4.5% to 5.5%. We are increasing our reported net revenue growth by 3 percentage points. This equates to a reported net revenue growth of 1% to 2% for the year. This incorporates a 50 basis point drag from foreign exchange versus the 250 basis points incorporated in our prior outlook. Our guidance continues to assume a 3-point headwind from the exit of Denizen, our footwear business, and the 53rd week. We continue to expect gross margin expansion this year despite tariffs. As noted above, we expect an approximate 20 basis points net impact. Our full year expectation for gross margin is now up 80 basis points to prior year, a new record. We still expect our SG&A rate to be around 50%. We also expect our gross profit dollars for the year to be significantly higher than the SG&A dollar increase, leading to EBIT margin expansion of 70 to 90 basis points to prior year. As a result, our full year EBIT margin expectations are maintained at 11.4% to 11.6%. And we are raising our adjusted diluted EPS by $0.05 to between $1.25 to $1.30. For clarity, this guidance now includes a net tariff headwind of $0.02 to $0.03 and a $0.14 headwind from tax and FX versus prior year compared to the $0.20 assumed in our previous guidance. Now let me provide details on quarter 3. For the third quarter, organic net revenue from continuing operations is expected to be up 4% to 5%. This is on top of a 4% organic growth in quarter 3 2024. We expect quarter 3 reported net revenue growth of 3% to 4%. This includes 100 basis points tailwind from FX and a 200 basis point headwind from our business exit. Gross margin is expected to be flat to up 30 basis points after incorporating the impact of tariffs. We expect adjusted EBIT margin to be in the range of 10.8% to 11.2%. While below last year, this is due to a shift in the timing of marketing expenses from quarter 4 to quarter 3, ahead of the launch of our new campaign, and as mentioned above, an increase in distribution expenses as we progress through our DC transition, which will be completed by the end of the year. And we expect our quarter 3 adjusted diluted EPS to be in the range of $0.28 to $0.30. This includes an approximate $0.01 net impact from tariffs and about $0.02 from a higher tax rate versus prior year. In closing, we have started the year with momentum, growing faster than the category with both channels contributing. While there is still uncertainty on the macros largely driven by tariffs, we are in a good position to mitigate the adverse impact, given our brand, product and profitability momentum. Our transformation to a more profitable DTC-first denim lifestyle retailer is working and positions us well to drive mid-single-digit organic growth annually and build a road map to deliver 15% operating margins over time. I will now open up the line for Q&A.

[Operator Instructions] Our first question comes from the line of Matthew Boss of JPMorgan.

Congrats on a great quarter. Michelle, could you speak to drivers of the demand strength that you're seeing today? Have you seen any moderation of momentum for the Levi's brand globally to date? And maybe could you help size up market share gains relative to the industry? And then for Harmit, could you just walk through the clear inflection that you've seen in gross margin? What has structurally changed? What levers are durable and really support the higher margin profile that you cited in the release and on the call?

So Matt, thanks for the question. I mean, we are just so pleased to report this quarter our third consecutive quarter of high single-digit growth, plus 9%. And of course, with this confidence, as you know, we raised our full year guide. We are seeing broad-based growth across the business, both direct-to-consumer and wholesale, international and our U.S. domestic business, women's and men's, tops and bottoms. We're seeing it in newness and we're seeing it in rising AUR's. So it is evident that our key strategy is because that we're making to become a DTC-first company and not just DTC-only but our wholsale businvess also. So we're supporting that business, it grew as well, but really rewiring this company to be a best-in-class retailer and the evolution from a denim bottoms business to a full head-to-toe lifestyle business. The team is executing. Our product is resonating. The pipeline has never been more robust. A lot of newness, freshness, whether that's in fit, loose, baggy still doing really well. Fabric, our linen denim was a big hit earlier this year. Shorts are doing really well, warm summer. So product is doing great. And like I said, men's and women's. In women's, we have a distorted focus, as you know, because we're underpenetrated, and we're once again double digit there. The brand has just never been stronger, and that's being fueled really by a variety of things. We're built on a strong foundation heritage but you do have to earn it every day. And so showing up where the consumer is, whether that's social media, center of culture, music, Beyoncé, dressing Shaboozey. As they say, you are the company you keep and we get pretty good company. And today, NIKE joins that family as well. And based on the lines out the doors this morning, we think this NIKE collaboration is going to be a really big hit. And in terms of -- as we look forward, as we moved into June, we've seen the trends continue. And I don't think we have any reason to believe they're going to fall off because this is core to the strategy of the business. And then the only thing I would add is market share. We continue to maintain our global top market share position and then our #1 position here in the U.S. for men's and women. Over to you, Harmit.

So on gross margins, let me start by just reinforcing, we're building a stronger, more focused, higher-performing company and one defined by accelerated growth, expanding margins and superior returns on invested capital. So to answer your question about gross margins, the gross margins, we're hitting a record every quarter and we'll hit another record end of this year. '23, as you know, was a little -- was around 57%. So what are the drivers, Matt? One is the -- structurally the fact that higher DC, higher women's, higher international, higher gross margin. Now that's something you guys have heard over the last couple of years. It's consistent. We're really leaning into it. You've seen it in terms of delivery of results. The second is narrowing the focus did help. Exit of Denizen, exit of Dockers made a difference. And then in the part of the end, what is the end here? The first is, as part of the transformation, we are taking a harder look at productivity in our assortments. Lower- turning SKUs, let's eliminate them. Our go-to-market calendar, let's get tighter, et cetera. That leads to higher COGS over time. And then the product pipeline is really resonating so we're really driving full price sales and reducing promotions. So that's really how we're thinking about it. There are some headwinds on tariff. I've talked about it. FX, maybe a little but we hedge it. So some puts and takes, but we feel good. And I'd say if you -- some of you are thinking, are we at the peak of gross margins? I'd say we're not done yet.

It's great color. Best of luck.

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

I wanted to ask about organic wholesale revenues. In tonight's 8-K, it shows that they were up 6% for 1H. But I think you called out that wholesale should be up slightly for the year, which would imply 2H should be down low single digits. But at the same time, I think, Harmit, you called out the order books remain positive for the balance of the year. So can you maybe square away how we rectify that in terms of math? Or asked another way, how should we think about 3Q wholesale revenues?

Laurent, first, to answer your question that you asked a couple of weeks ago, we did deliver 13 consecutive quarters of same-store sales. So I'll just put that to bed. To your question about -- you asked for it, I want to make sure. I couldn't answer you 4 weeks ago, I can answer you now. To your question about wholesale, we're just being prudent, Laurent, and judicious in our approach. I mean, our view is, as our wholesale customers with the prebook and the demand signals we're getting, lean into all the product assortments, this channel will continue to grow. It's just important to be prudent. It's a channel we don't control, but over time, we believe the channel should be flat to positive. It's a big piece of our business and we have wonderful partners. If you think of the wholesale business, we're getting growth from the digital channel, we're getting growth from our premium customers and department stores in the U.S. are a smaller piece of our business, but we are working with them to grow this business over time.

So the growth in 3Q wholesale organically, something like low to mid-single digits, is that the right way to think about it, Harmit?

Yes. We don't disclose by channel but I'd say we'd probably lean in, in quarter 3 more than Q4 only because we're filling the flow for the holiday season. The other thing, Laurent, just for you and for everybody's benefit, think of our business on a 2-year stack. So the first half, we were up 9%. Last year, we were probably flat. The second half, we were probably up last year 4% or 5%. And so a 4% organic -- 4% to 5% organic growth over 4% last year in quarter 3 is actually growing at the same pace. And so that's what I'd like you to think about.

Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

Congratulations, everyone, on the very nice results. Michelle, as you think about the brand and the marketing initiatives, I saw some of the NIKE things today, and I agree with you, was definitely very busy. What are the other marketing thing activations that we should look forward? Harmit, how do you think of marketing spend and price increases? Where are you in price? And how much more does AUR have to go, and which categories do you think there's opportunity?

So I can make mine pretty brief here, Dana. As we said in our remarks, the brand has never been stronger. And that is being fueled by relevant product. Very exciting to see our vision of head-to-toe denim lifestyle really come to life and the consumer is responding. We're investing in the brand, so this -- we always talk about being at the center of culture. And we are driving it and the kinds of partners and collaborations that are emerging and people who want to partner with us is super exciting. So whether that was Sacai, very elevated designer out of Japan. We had a very successful launch there. Today, dropping NIKE. Beyoncé has been a great success. And we've just been thrilled with her being a bit of an ambassador of the brand. Shaboozey wearing our product at the festivals. And then as we look forward, we still have more of Beyoncé to go. And then we are going to have a really exciting campaign oriented to men this fall. So when we think about fall and holiday, I feel like we're really well positioned to make sure that the brand stays extremely strong.

On your question on marketing expense, Dana, around 7%. There's a timing change between Q3 and Q4 and that we indicated so that's how we're thinking of marketing. To your question about AURs, let me just first start with another quarter where volumes were 2/3 of our growth and AUR is 1/3 is, again, magic of the end, like I like to say, it's good to have both. AUR is essentially broad-based across geographies, across channels and across categories. And the other thing is not coming at the expense of volume. And we have products that are being rolled out that will continue to improve this, think the Blue Tap which is our premium Tier 1 offer that's done very well in Asia. So again, room to grow from where we are today.

Our next question comes from the line of Jay Sole of UBS.

I have 2 questions. Michelle, at the top of the call, you talked about the 4 key drivers that have been going on as part of the strategy for the last 18 months. Can you just dive in to operate with rigor a little bit? And just tell us why is it, it seems like now that there's an acceleration happening in the business? The capabilities just sort of seem to getting better because the company has been working for a long time on operating with rigor and narrowing the focus and becoming a lifestyle brand. Just maybe if you can touch on what's really happening now and give us an anecdote from, say, supply chain or something that's happening that's allowing the company to have the strong results that you're talking about today. And then secondly, just on the tops business. I think you said tops were up 16%. Can you just talk about the quality of the tops business? I think in the past, there's a lot of traffic or logo tess, batting tees, things like that. Talk about the kind of tops you're selling today and talk about how you feel about that and give us maybe a little context around how that tops business is evolving and the confidence you have that if you can keep growing at a strong rate.

Great. So to your first point, as I did say earlier in the call, we are operating with greater rigor and discipline and really infusing the entire company with a DTC-first mindset. And what does that mean? First, if we start with product. We are in process. We've been talking about reducing the time of our go-to-market. That is happening. We're introducing agility tracks so we can chase products better or in things that turn quicker like tops, they're just on a shorter cycle. So that is happening. Number two, we have had a massive effort afoot to have a more globally directed assortment. And if I look back a couple of years ago, that number was in the single digits of what was common across the globe. That number is more than 30% first half of the year and it's growing. You can imagine the kind of efficiencies that you get from that. And along with that, we are being really disciplined on reducing nonproductive SKUs. So the reduction is in the team to make way for fresher, newer products that can ultimately turn better. We are putting a lot more rigor. You commented on the supply chain in terms of service levels, so that service levels in our stores and service levels in wholesale. And then to your point on tops, I mean, this was a complete end-to-end reset, and the team has done phenomenal work. They set a new vision. We brought in new design capability, merchandising capability, vendor, supply chain, you name it. And the success is broad-based and that's what's so exciting. So we saw growth in men up 14% and DTC was similar. Women's up 19% overall. So these numbers are both across channels. Denim tops are really driving it. I mean, we are the leader in denim so we're pushing that. Sweaters, workwear. And then on the women's side, things like dresses, jumpsuits, that's in the tops category. And as we said, we really want to own this denim lifestyle and even categories like outerwear. So this is no longer a T-shirt business, just T-shirt business for Levi's. We are in the top business, full stop.

Our next question comes from the line of Chris Nardone of BofA.

Can you help us think about how the margin profile of your DTC business has evolved over the last couple of quarters and where it sits today? And then I'm just trying to think, looking out into next year, is there anything structural preventing you to returning your business to a sub-50% SG&A rate as you strive towards this 15% margin goal over time? I'm just trying to think through the puts and takes of a DTC-weighted algorithm could prevent you from reaching your medium-term plan.

Yes. Chris, I'm glad you asked this question. DTC, yes, the aggressive growth or the double-digit growth in DTC or the 13 consecutive quarters of same-store sales and DTC becoming a 50%-plus business or total mix is not a drag on EBIT margins anymore. It is actually progressing well. Year-to-date is up 400 basis points to last year. Last year, we ended at about 400 basis points. It's probably in the high teens. There is a gap between wholesale and DTC. It used to be probably in the low teens a couple of years ago. So what is really making the difference? The first is revenue per square foot. I mean, the fact that comp sales are up, the fact that revenue per square foot is the prime driver. It's actually the prime driver of the DTC EBIT margins is a big thing. So we really -- we are measuring it. We are looking at ways to improve it. The throughput of our new product offers is making a difference. The fact that we have more women product in the -- on the floor tops that Michelle talked about, I think that's probably making the difference. Taking a hard look at cost management, the cost of new builds, the cost of things like labor management, et cetera, is also helping. So those are the factors, I think, that are driving it. I believe we are in the early innings of this. And as we make this pivot to DTC-first, this is something that's going to be important. The only other factor I would say sometimes gets lost in translation, our e-commerce business is now a profitable business. It used to be a drag. We always said you grow the top line, you leverage costs, and that's what's happening. The business that's growing in the mid-teens, that's making a difference. And as we bring our distribution network, to make it more omnichannel, that should again help because you're leveraging fixed costs as against variable costs.

Our next question comes from the line of Paul Lejuez of Citi.

As it relates to the tariff assumptions, I think I heard you say 10% and 30%. Curious where you're planning Vietnam and maybe some of the other countries that we've heard about. And then on price increases, I'm curious what you have planned for the back half and what the implied driver of top line is in terms of units versus AUR.

Yes. Paul, the tariff situation is fluid. It's difficult to plan with every day there being an expected change. So what we decided to do for this guidance is assume an additional 30% for China and an additional 10% for every other country around the world. That's what we have factored in at this stage. I quantified the impact, $25 million to $30 million for the year and 50 basis points of gross margins. I also talked about things we are doing to offset it and the net $0.02 to $0.03 impact on the business. Overall, the way we think about it is, competitively, we are well positioned, right, despite all the uncertainty. 60% of our business is international. A lot of our core products are multi-shows, both geographically as well as through vendors. And we're thinking '26 at this stage. To your question about pricing, it's targeted, it's minimal. We're using the new products as a vehicle to try and drive that. But more importantly, we're really focused on reducing promotions, driving full price sales.

Our next question comes from the line of Alex Straton of Morgan Stanley.

Just a couple for Harmit, maybe first just on the sales trends so far this year, mid-single-digit organic, even higher than that. So as we think about a more normalized growth trend as we get some of these kind of temporary factors out of the business, where do you think Levi should be growing at medium term? And then just a more nearer-term question. It looks like the full year guidance assumes that back half SG&A falls compared to growing in the front half. Can you just remind us what's enabling that change in trend?

Yes. So to your first question about top line, I'd say mid-single-digit growth is what Michelle and I and the rest of the executive team are focused on and doing it consistently so that you can get to that $10 billion over time. To your question about SG&A, the fact is, Alex, we have leveraged SG&A year-to-date on a full year basis, because we're looking at organic revenue as a good thumb rule. Our view is SG&A at 50% does leverage. Where we're spending is largely in areas that make us a better DTC-focused company as against anything else. So I talked about distribution expenses. That remap is happening, a big shout-out to our distribution teams who collaborate with our commercial teams to ensure that we meet the demand, which is there as we make this change. The second is, I talked -- we talked about earlier the fact that we are going to be opening stores, right, on a net basis, 50 to 60 stores. 20% or 30% of that franchise will largely being operated. We're taking a few markets back. So that's the other piece. And then the ERP upgrade is the other piece that we are working on. But overall, our view is that SG&A does begin to leverage, especially as we get to the mid-single-digit. The way we are thinking about it, Alex, is does the gross profit dollars increase more than offset the SG&A increase, and we're seeing that in flow-through and in EBIT margin.

Our next question comes from the line of Peter Goldrick (sic) [ Peter McGoldrick ] of Stifel.

I was curious on the enhanced loyalty program. You pointed out some encouraging directional drivers. As you roll out in the U.S., can you point to any expectations for contribution embedded in the back half as you roll that out in the U.S.?

We don't break out -- first, Peter, welcome. Second, we don't break it out by channel or by geography. It's what you heard from others, what you heard from us. Our more loyal consumers, our more loyal fans drive higher frequency and are definitely embracing the denim lifestyle offer. And this will continue to be an opportunity. For a brand our size, Michelle and I and the team joke about it. We should be having probably 100 million loyal fans of consumers. And this used to be 0 until just after COVID. And so that's how we're thinking about it, Peter.

Our next question comes from the line of Paul Kearney of Barclays.

I know it's broad-based by geo and channel, but can you give some additional color and detail on the AUR lift for the quarter between promos, price or mix? And then second, can you talk about the expectations on the wholesale business and how retailers are managing inventory? And how is the growing lifestyle assortment with women's and tops enabling new opportunities with retail customers?

Okay. So on AURs, yes, it is broad. I'd say DTC, probably a little stronger than wholesale. I would say women's probably a little stronger than men's. And regions, I would say the U.S. and Europe probably a little stronger than Asia. That's just thinking about the color on how the customers are thinking.

To your question on wholesale, I think we'd say largely inventories are in good shape across the channel. And I think your question on how are they responding to our lifestyle assortment, I think it's been very positive. I mean, certainly, some customers are further ahead than others. But if you take, say, Europe, we have more premium offer even in wholesale, and that business is doing really well with partners like Galeries Lafayette, with

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

You had really nice broad-based strength, but men's lagged women's, and also Asia was weaker than we expected. I know you're undergoing changes there. Would love your thoughts there. And how did your guidance interrelate with your order books? It sounded like you had pretty encouraging order books, but was it the right methodology to raise guidance, given the uncertain environment? And then as you mentioned, life cycle management products. What should we know about what inning you're in? And are merchandise margins, they're not peakish, given the feedback you offered on the call, Harmit.

Yes. So on the question of guidance, it's important, Oliver, if you were in our shoes, you'd feel the same. It's important to be prudent and judicious. And given the demand signals we are seeing, It is part of it. And so given that we've had 3 quarters of high single-digit growth, we see the momentum continuing because the consumer I think, as Michelle said, generally is resilient and continued fan of the brand. So that's question one. To our life cycle management, this is, Oliver, going back to DTC-first, right? This is about making sure that our store associates and our operations team and commercial teams around the world, especially with the new product offers, are able to drive higher full price sale over a period of time before marking it down, seeing sell-through by store versus by country, things as simple as that. So we are in the process of really focusing and driving an opportunity. You had a question about wholesale or Asia?

Yeah, and then I can take that one.

Yes. So on Asia, Oliver, Asia, we're long on. It's a business that we feel we are underpenetrated. There are markets like India and a couple of other markets, Japan, for example, that are growing very nicely. China is a small piece of our business. It's about 2%. We think '25 is a year where we reset China, and our teams are on the ground right now thinking through that. Probably get back to growth sometime in '26. But over the year, we think Asia grows in the mid-single digit and EBIT margin expands. And then Michelle?

Yes. So I think to your question on men's and women's, I mean, I actually view it, Oliver, as. I mean, we already have so much market share in the men's business. And we've got to continue to obviously protect it and grow it. But 6% we felt was quite strong, and the men's business is responding to the innovation we're bringing in bottoms, things like the linen denim, baggy and loose, it's like 555, the relaxed fit, the 578 Baggy, we had to chase that 1 even a bit. And then our tops business in men's up very nicely, up 14% for the quarter. Clearly, we are seeing an outperformance in women's as we should because we're still underpenetrated there. We're only 38%. And I think we all know that, that business should be at least half of our business, and we're making really good progress. I mean, I think for context, the Levi's women's business is up almost twice in 2019, 2x where it was 5 years ago, and yet we still have so much runway ahead. So I don't think it's an either/or. I think it's an and.

Okay. And did you -- Harmit, did you think merchandise margins are peakish in terms of where you are relative to pricing? And per square foot [indiscernible]

I think our view is that -- and the answer is no. We're in the -- we're nowhere near in the middle of the journey for DTC-first. We're probably in the early innings. So I think as we get better at retail and retailing, it probably improves over time.

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

Michelle, Harmit, I was hoping you could dive a little bit deeper into the momentum that you've seen in the Europe business. Outside of the distribution center adjustment, are there any other onetime drivers of outperformance that you think might normalize for the rest of the year? And given the stronger performance and stronger partnerships, what do you think the medium-term run rate of growth could be in the European market ahead?

To your question about onetime, if you -- the best way to look at Europe is to take a year-to-date view. Wholesale is up 7%. I think Europe year-to-date is up in the high single digits. The demand books for the fall are positive. So in our view is thinking of Europe in the mid- to high single digit is a good way to look at it. Secondly, when the company was over $7 billion Europe for the $2 billion business, right now, it's $1.5 billion. So we have a clear opportunity. We have a great team on the ground. They're working through it. A couple of years ago, Brooke, we got a little hurt because we didn't have the products on the floor to respond to warmer weather. And today, we have the linen that Michelle talked about. We have lighter weight denim tops. We have a lot of shots. And so we are -- we have product that responds to global warming. Michelle, you were just there so I'm sure you have some insight.

Yes. No, I just -- I know we're at time but I would just say being on the ground the market, we have a phenomenal leadership team there that's executing like crazy. Our DTC business is super strong. The product is relevant. All the things we've been talking about, brand relevance, center of culture, the pipeline. So we are -- we're long on Europe. We still think there's a lot of opportunity. And with that, we'll close out the call. Thanks, everyone, for joining, and we look forward to speaking with you next quarter.

Thank you. This concludes today's conference call. Please disconnect your lines at this time.

Thanks, Latif.