Yahoo Finance Levi Strauss & Co. (NYSE:LEVI) Q2 2024 Earnings Call Transcript
Levi Strauss & Co. (NYSE:LEVI) Q2 2024 Earnings Call Transcript June 26, 2024
Levi Strauss & Co. beats earnings expectations. Reported EPS is $0.16, expectations were $0.11.
Operator: Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company’s Second Quarter Fiscal 2024 Earnings Conference Call for the period ending May 26, 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 & Company.
Aida Orphan : Thanks, Latif. Thank you for joining us on the call today to discuss the results for our Second 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 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 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 financial measures are not intended to be a substitute for our GAAP results. Reconciliation of our non-GAAP measures to the 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 numbers unless otherwise noted. And now I would like to turn the call over to Michelle.
Michelle Gass : Thank you, and welcome everyone, to today's call. We delivered another strong quarter with revenue up 9% in constant currency and 2% adjusted for the ERP shift and the exit of the Denizen business, reflecting sequential improvement across the business. The ongoing acceleration in the business gives us confidence in the second half of the year and beyond. Here are a few highlights. We continue to see strong growth in our direct-to-consumer channel, up 11%, reflecting nine consecutive quarters of robust comp growth. The Levi's brand continues to gain momentum up 2% on an adjusted basis. Our global Levi's women's business is accelerating and delivered 22% growth in DTC in Q2. Levi's now ranks Number 1 in Women's Denim Bottoms in the US.
Our largest market, the US, once again delivered positive growth for a third consecutive quarter on an adjusted basis. Global wholesale sequentially improved, down 4% on an adjusted basis due to an improvement in sellout trends. While we are driving this growth, we are also improving our profitability as evidenced by record gross margins of 60.5%, enabling us to deliver a higher than expected, adjusted diluted EPS of $0.16. As I've shared previously, we are currently undergoing a significant transformational pivot to become a best-in-class direct-to-consumer retailer. While this evolution will span multiple years, our efforts are already positively impacting our quarterly results. I will now talk you through the details of the quarter in the context of our strategic priorities, leading with our brand, operating as a direct-to-consumer-first business, empowering our portfolio.
Starting with leading with the Levi's brand. A key indicator of brand health, we continue to make meaningful market share gains in the US, driving growth with women and our key youth target group of 18 to 30 year old, while maintaining our dominant leadership position in men. Importantly, we have maintained our leadership position across consumers of all ages and our unaided brand awareness remains well above our competition across most markets globally. We continue to drive brand heat and impactful storytelling by showing up at the center of culture across music, art and design, fashion and sports. We were thrilled and honored to have Beyonce name a song after us on her newest album. And as an example of our agility, we responded to the speed of culture, not only demonstrating our understanding of engaging social communities in an authentic way, but also generating more than 3 billion impressions and a ton of buzz for the brand that remains today.
We activated in a big way at Coachella and Stagecoach music festivals and launched collaborations with ERL, Stussy and Starter. As we look to the second half of the year, we have a number of impactful partnerships planned across the globe, including a Paris-themed collaboration with renowned label [Pigalle] (ph). This is also in support of our key city strategy, amplifying our efforts in Paris through initiatives like the opening of our iconic Champs-Élysées store in the second quarter and our Fifth House of Strauss. Moving to product, we saw strong performance in our core offerings, while also introducing newness and innovation in Denim and Beyond as we expand our total addressable market. We continue to lead the global trend around straight, loose, and wide-leg bottoms.
Now comprising more than 50% of our overall bottoms assortment, loose fits grew 21% across channels in Q2. We are continuing to lean into the trend this summer with the launch of a new baggy fit for women, the XL, which will be available globally and across channels, along with a new relaxed fit for men, the 555. The core of our business remains very healthy. Our original icon, the 501, continues to deliver impressive growth, up 16% in DTC, in Q2. Our strategic focus around Denim Dressing continues to gain traction, is becoming a more meaningful part of our portfolio, and is expanding our total addressable market opportunity. Denim Dressing continues to perform very well, with Denim dresses, skirts, and jumpsuits again up triple digits in the quarter.
We're also seeing success in tops and non-denim categories, evidence that our tops reset and increased focus on Denim lifestyle are working. Tops were up 20% in our DTC channel for Q2, with even stronger growth in women's tops, driven by our elevated essential offerings in women tops and non-graphic tees. The growing popularity of Western wear is at an all-time high, and our fans continue to choose from our collection of timeless yet fresh Western-inspired pieces. This includes our iconic Western shirts, which are seeing particularly strong sales in women up 40%. Relative to non-denim bottoms, our recently introduced Tech Pant in the 511 Fit for Men is delivering strong results. We see this as a new and expanding innovation platform driving incremental wear occasions for our consumers.
Given our early success, we'll be introducing a range of new products over the coming year, with the next introduction being the XX Chino, available worldwide and across both our wholesale and DTC channels. Looking to the second half of 2024, we will continue to deliver newness and drive innovation. For women, we have a strong lineup that supports our Denim dressing and Denim lifestyle strategy, including skirts, dresses, and jackets. We are also expanding into key categories like outerwear and sweaters to drive the head-to-toe offering. And following the success of our Performance Cool product, which we broadly rolled out globally earlier this year, this fall we are set to expand the innovative platform with the launch of Performance Warm, made with a soft interior that is designed for warmth and cooler weather.
Looking ahead, we are making great progress on our efforts to streamline our go-to-market calendar by reducing SKUs by at least 15% and addressing complexity in our process, which will start benefiting us in H1 2025. The team is already using some of the learnings to create more agility in our process, such as chasing into top sellers this season. As we shorten our timelines and operate with a tighter assortment, we will see a number of benefits including responding faster to consumer trends and enhancing our overall efficiency as a DTC-driven organization. Now, let's shift to direct-to-consumer, our next strategic priority and one of the biggest unlocks as we pivot to become a best-in-class omni-channel retailer. DTC continued to grow rapidly, up 11% on top of 14% growth in the prior year.
We achieved these strong results by delivering high single digit positive comp growth. As I shared on our last call, we've been laser-focused on driving profitability and productivity in our stores. This quarter, we saw an improvement across all store KPIs, led by higher UPT and better conversion driven by our new product introductions, an improvement in our in-stock position, and a continued focus on best-in-class engagement with bands in our stores. US DTC was up 12% led by our mainline stores. AURs and mainline were up low single digits as consumers gravitate toward our full price premium products. Globally, we continue to execute our retail expansion plans and are on track to open 100 net new doors this year. In Q2, we opened our largest store in Thailand at the Central World Mall in Bangkok.
This store is a pilot where we're implementing learnings from consumer research to improve the in-store consumer journey. By applying changes like displaying our Denim lifestyle categories more visibly throughout the store and elevating our premium collections, we drove revenue growth in both tops and bottoms. Results are encouraging and this is just one example of the great potential we have in improving store productivity. E-commerce continues to be a big opportunity for us, up 19% this quarter, led by double-digit growth in the US, where we are seeing strong full-price sell-through and strength in women, now comprising more than 50% of the business in this channel. Ongoing initiatives to elevate our site and enhance the consumer experience, as well as deliver a more premium and expanded assortment, continue to drive our momentum across all of our markets.
We also drove meaningful growth in our loyalty program, acquiring almost 2 million members in Q2, with 36 million members globally. As we make our pivot to be a DTC-first company, we also remain committed to wholesale. On an adjusted basis, our global wholesale business is down 4%, in-line with our expectations and a sequential improvement to Q1. We feel good about the trends we're seeing in our global wholesale business overall. The actions we've taken to stabilize this business are working. Sell-out trends are improving, including in the US and Europe, and customers are excited about our expanded assortment. Importantly, this channel is significantly more profitable than last year, amplified by our healthier inventory levels and the improvement in our supply chain operations.
Turning now to our third strategy, powering the portfolio. Our international business is becoming a more meaningful contributor to our business and grew low-single digits in the quarter. This reflects 6% growth in Asia on top of 27% growth in the prior year, bolstered by strength in Japan, India, and Turkey. And our Europe business sequentially improved down low-single digits in the quarter, with certain key markets, including Italy and Spain, positive in the quarter, as well as an improvement in performance across both wholesale and DTC. Dockers was down 1% on an adjusted basis, coming in below our expectations. Profit exceeded prior year, led by gross margin expansion and disciplined expense management. And inventories are significantly below prior year, down 16%.
Going forward, we'll be leaning into innovation with an expanded head-to-toe collection of the performance-based Dockers Go Series, which has exceeded expectations since its launch. Beyond Yoga was up 13% in acceleration to Q1, driven by strength in wholesale and e-commerce. In the quarter, we continue to see success in our much loved core space-dye business, as well as wins in new lifestyle categories, like wider leg pants and dresses. Our new CEO of Beyond Yoga, Nancy Green, has moved quickly to bring in seasoned industry leaders in product development, sourcing, retail, e-commerce, and marketing to build the capabilities to rapidly scale this business and achieve the long-term potential of the brand. To conclude, we are pleased with our performance through the first half of 2024, which underscores that we have the right strategies in place to drive long-term sustainable and profitable growth.
The Levi's brand has never been stronger. We continue to gain market share and our amplified focus with women and younger consumers is working. We have momentum across the world, including the US, where we have delivered three consecutive quarters of positive performance. We are seeing a strong response to our innovation and product launches centered around owning Denim lifestyle and have a robust pipeline for the remainder of the year. Our transformational pivot to operating as a DTC First company, is reaching a tipping point with accelerating sales momentum and an improvement in margins. And we have an incredible, talented, and passionate team around the world that is driving this transformation and delivering outstanding service with our consumers every day.
All of this gives me great confidence for the rest of the year and beyond. And with that, I'll now turn it over to Harmit to cover the financials.
Harmit Singh : Thanks, Michelle. We are pleased to have delivered earnings that significantly exceeded expectations despite stronger than expected headwinds from FX and a higher tax rate versus the prior year. Gross profit dollars grew twice as fast as SG&A dollars, reflecting both revenue and gross margin growth, but also our relative expense discipline driving higher operating margins. Going forward, this is a key metric we are focused on to enable us to achieve a longer-term goal of 15% high-quality margins. Our DTC business continues to not only be our fastest-growing business, but is also seeing real improvements in profitability, with operating margins increasing more than 300 basis points during the quarter. This includes a significant improvement in e-commerce profitability, with EBIT margins now double digits on a fully allocated basis.
The improvement in profitability in our DTC business surpassed our own expectations. And we believe we will continue to grow profitability in this channel as we pivot to a DTC first company. And as our wholesale business becomes a smaller piece of our overall business, as Michelle mentioned, it is more profitable as inventory levels have normalized and gross margins across the business have increased, which we are focused on sustaining. The benefits from Project Fuel are progressing as planned and we believe our strategies related to this initiative are working. We remain on track to deliver $100 million in savings this year through a workforce reduction that has largely been implemented, savings from indirect procurement that are in progress and higher productivity from our DTC business, which is evident from our recent results.
We also believe there will be additional savings in 2025, which we intend to quantify when we guide next year. In the quarter, we continue to make improvements in reducing our inventory position. And along with working capital management, we have generated positive free cash flow of $223 million in the second quarter and $437 million year-to-date. Shareholder returns in the quarter were up 36%, as we bought back shares and paid dividends. Reflecting our confidence in our cash flow position, we are increasing the quarterly dividend by 8% to $0.13 in quarter three. Making this the first increase in dividends since July of 2022. And with that, I will turn to our results. Q2 net revenues were $1.4 billion, reflecting continued momentum in our global direct-to-consumer channel, which grew 11% and up 26% on a two-year stack.
Along with our franchise partners, we have opened 30 net new doors in H1, excluding the Columbia take-back. Together our DTC and franchise business comprised 54% of total net revenues. We remain on track to open a net of 70 stores in H2, ending the year with a system-wide store count of more than 2,600. Gross margin of 60.5% was a record high and improved 180 basis points year-over-year. Expansion was primarily driven by lower product costs, the structure shift to DTC and the faster growth from our women's business all coming in higher than our expectations. These factors offset over 100 basis points of FX headwinds. Adjusted SG&A expenses in the quarter increased 4.3% to $785 million, and as a percentage of sales, adjusted SG&A was 54.4%, 190 basis points lower than last year.
The S&A leverage was slightly better than our expectations, as we began to see the benefits of our cost control actions and our global productivity initiative, Project Fuel. The increase in SG&A dollars was primarily related to additional incentives accrual in quarter two, 2024 versus last year. Gross profit dollars increased by 11% and grew at twice the pace of S&A dollars, leading to EBIT leverage with adjusted EBIT margin increasing 360 basis points to 6%. Adjusted EBIT dollars also significantly increased versus last year. On an H1 basis, gross profit dollars also grew at a faster pace than SG&A dollars, driving an increase in adjusted EBIT margin of 40 basis points. Adjusted diluted EPS was $0.16, up $0.12 from prior year, significantly exceeding our expectations.
Reported inventory dollars were down 19%. Excluding the impact of the modification of terms with the majority of our suppliers. This reduction was better than our plan and overall inventory is expected to end the year below prior levels as we work to further optimize inventories. As part of Project Fuel, we are focused on getting inventory turns back to three over time, as we drive assortment productivity. This will release significant working capital. Let me take a moment to talk to you about the significant changes we are making to our global distribution and logistics strategy. We have made the decision to move from a primarily owned and operated distribution and logistics network in the US and Europe to one that will be more balanced between our own and leading third-party logistic providers.
As we continue our pivot to a DTC first company, our distribution networks need investment including upgrading existing capacity with omni-channel capabilities. A new strategy allows us to secure these investments in a capital efficient manner by leveraging third-party capital while freeing up our own resources to invest in growing the direct-to- consumer channel. This will also enable us to reduce our fulfillment costs per unit compared to running the facilities ourselves, while immediately delivering a cash infusion of over $90 million this year, primarily as a reimbursement of the capital spent to build a new distribution center in Germany. In the near-term, the changes require the parallel operation of new and old facilities for the rest of 2024 resulting in a transitory increase in distribution costs with a negative $0.02 impact to EPS in 2024.
We expect we will begin to see a favorable $0.02 impact to EPS in 2026, which will progressively increase in 2027 and beyond as distribution costs come down and inventory efficiencies improve as we better service our omnichannel needs. Now let's review the key highlights by segment. In the Americas, DTC revenues were up 16% driven by double-digit growth in brick and mortar and e-commerce. While US, wholesale was down mid-single digits, the US Market grew low-single digits entirely as a result of DTC growth on an adjusted basis. We are also seeing meaningful improvements in profitability across both channels. Robust gross margins driven by favorable brand and channel mix and reduced product costs resulted in strong operating margins of 18%. Notably, our gross profit dollars grew significantly faster than our SG&A expenses.
In Europe, DTC revenues increased 7%, a sequential improvement to Q1, reflecting growth in mainline, outlet, and e-commerce. Wholesale while down 11% has improved versus last quarter. Given the continued strength in DTC and the sequential improvement in wholesale, we continue to expect Europe to return to growth in H2, with a pre-book in Europe up mid-single digits for the second half. In the quarter, gross margins were up 420 basis points, offset by SGA investments resulting in a 15% operating margin which was flat to last year. Asia net revenues increased 6% compared to the prior year and are up 34% on a two-year stack. DTC revenues increased 6% driven by strength in e-commerce and company operator stores and wholesale net revenues were up 5%.
China while lapping 95% growth in the prior year from the COVID-reopening, was down by 10%. We have recently enhanced our locally relevant product assortments and believe this should help improve the business. Excluding China, Asia was up 9% driven by growth across most markets. Overall for the quarter, Asia delivered an operating margin of 13%, which is 70 basis points higher than prior year, largely driven by gross margin expansion. Now let's turn to our fiscal 2024 outlook and I [will also shade color] (ph) on the next two quarters. Sales trends were consistent each month in the quarter and we saw strength in several key drivers of our business, including the US market, acceleration of our global DTC business from last quarter, and robust growth in women.
However, despite the supportive trends, headwinds from foreign exchange have recently increased, especially with the Euro and Mexican peso, creating a wider divergence between reported and constant currency performance with a more meaningful impact in quarter three. As a result of the FX impact on our business for the full year, we now expect full year reported revenues to be at the midpoint of our range of 1% to 3% year-over-year growth, with revenue in constant currency trending closer to the upper end of our range. As [respect to gross margin] (ph), we now expect the full year to be up 180 basis points to prior year. 30 basis points higher than our previously guided range despite incremental FX headwinds of approximately 20 basis points for the year.
This will be offset by an increase in SG&A, due to the transition in our logistics and distribution network, I spoke to earlier and a slight increase in advertising as we continue to fuel the momentum of our business. Additionally, we reiterate our expectation for approximately $15 million a quarter in interest and a mid-to-high teens tax rate. As respect to earnings, we are making long-term investments in the business with our distribution and logistics transition, as well as our brands with an increase in marketing. We expect these investments will impact full year EPS by $0.03. We also expect the impact of FX to be an incremental $0.02 headwind for the year. Given these factors, despite the beat in Q2, we are maintaining our adjusted diluted EPS estimate of $1.17 to $1.27 for the year at this time.
Let me give you a bit more color on the back half of the year. In Q3, we expect continued sequential improvement in revenues. We reported revenues up low-single digits and low to mid-single digits on a constant currency basis. This is inclusive of a currency headwind of over 100 basis points. Revenue growth in quarter four, will inflect upward to mid-to-high single digits on both a reported and constant currency basis, including a 60 basis point headwind from FX. The improvement in Q4 versus Q3 is driven by the fact that the majority of store openings are skewed to the fourth quarter and there is the benefit of the 53rd week. In the third quarter, gross margin will accelerate and be up approximately 200 basis points to prior year, as we will have fully anniversary the pricing actions we took last year with the benefits of product cost, higher DTC and women's continuing.
We also expect the mid-single digit increase to S&A due to continued expansion of DTC, higher A&P and incentive funding compared to prior year, as well as incremental costs related to our distribution transition, partially offset by savings from Project Fuel. We are confident that the acceleration in sales and profitability from Q1 to Q2 versus prior year will continue into the second half of the year. Our confidence is rooted in several factors. First, we are seeing a strong response to our new product assortment and more exciting launches set for the second half. We also focused on full price sales, particularly in our mainline stores in the US, as we continue to introduce new products. Second, we continue to see momentum in our DTC business.
And as I mentioned, store openings are skewed to H2, when 70% of our net new doors are slated to open. Third, we are confident in the continued strength of our US Business, and Europe overall is poised to return to growth in H2, supported by a positive wholesale pre-book and continued strength in DTC. Fourth, as we become a more DTC-focused retailer, we are confident in our plans for back to school and our holiday product and marketing campaign. The benefit of the 53rd week contributes approximately a point to H2 and 2 points to quarter four. And as we think about the profitability improvements in H2, our gross profit dollars are expected to grow 2 times the pace of SG&A dollar growth. To close, we delivered on our commitments and saw solid results in H1.
The strategic and financial benefits of our shift to DTC are getting us closer to the consumer. And along with a smaller, yet more profitable wholesale business, it's improving the structural economics of the company. We continue to be confident in the acceleration in revenue, profitability, and free cash flow while taking some tough but transformative actions to become a best-in-class omni-channel DTC-first retailer. And with that, I will go ahead and open up the line for Q&A.
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