Release Date: June 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue increased by 9% in constant currency and 2% adjusted for ERP shift and Denizen business exit.
- Direct-to-consumer (DTC) channel grew by 11%, marking nine consecutive quarters of robust growth.
- Levi's women's business delivered 22% growth in DTC, with Levi's ranking number one in women's denim bottoms in the US.
- Record gross margins of 60.5%, leading to higher than expected adjusted diluted EPS of $0.16.
- E-commerce grew by 19%, with strong full-price sell-through and strength in women's products.
Negative Points
- Global wholesale business was down 4% on an adjusted basis.
- Dockers brand underperformed, down 1% on an adjusted basis.
- China's revenue was down by 10%, impacting overall Asia growth.
- Incremental FX headwinds and higher tax rates posed challenges.
- Transition to a new distribution and logistics strategy will result in a temporary increase in distribution costs, impacting EPS by $0.02 in 2024.
Q & A Highlights
Q: Can you talk about your confidence in the 2H acceleration for the top-line? How should we think about overall wholesale for 2H?
A: (Harmit Singh, Chief Financial and Growth Officer) We are confident about the acceleration in both top-line and bottom-line in the second half. This confidence is driven by several factors including a strong product lineup, continued strength in DTC, and the benefit of new store openings. (Michelle Gass, CEO) We are seeing sequential improvement in our wholesale business globally, particularly in the US and Europe. Our strategies around product and supply chain improvements are gaining traction, leading to better sell-out trends and customer excitement.
Q: Can you talk a little more around what you're seeing from the US consumer, both male and female, and the trends within the denim business?
A: (Michelle Gass, CEO) Our US business is performing well, with DTC up 12% driven by strong growth in women's categories. We are the number one market share leader in women's denim bottoms and continue to hold the top position in men's. Our consumer is resilient, and we are driving innovation and newness in both denim and non-denim categories, which is resonating well.
Q: Could you elaborate on assortment changes that support an expanded total addressable market (TAM) for the Levi brand?
A: (Michelle Gass, CEO) We are expanding our TAM through head-to-toe denim dressing and non-denim categories. We are seeing strong early indications in denim skirts, tops, jackets, and dresses. Additionally, our non-denim offerings like the XX Chino platform are performing well, and we are expanding into performance categories. This broader assortment is driving market share gains and expanding our consumer base.
Q: Can you break down gross margin puts and takes for the back half of the year relative to the distribution and logistics headwind?
A: (Harmit Singh, Chief Financial and Growth Officer) In Q2, gross margin was driven by lower product costs and favorable mix, offset by FX headwinds and airfreight costs. For the second half, we expect continued benefits from product costs and mix, with FX headwinds diminishing. We are confident in achieving record gross margins for the year.
Q: How should we think about the increased marketing spend in the second half of the year?
A: (Harmit Singh, Chief Financial and Growth Officer) The increased marketing spend is about $0.01 higher in H2 to fuel brand momentum and drive awareness for new product launches. We expect marketing spend to be around 7% of revenue for the year, with a focus on driving long-term revenue growth and brand equity.
Q: Can you elaborate on the progression of US DTC results through the quarter and comment on whether trends have sustained in June?
A: (Harmit Singh, Chief Financial and Growth Officer) US DTC results were strong and consistent throughout the quarter, with continued momentum into June. The team is driving productivity and profitability, with significant improvements in EBIT margins. (Michelle Gass, CEO) The US wholesale business is also improving, with better sell-out trends and leaner inventory levels.
Q: What are the drivers of the DTC increases in each of your regions, and have you changed your expectations for the second half?
A: (Harmit Singh, Chief Financial and Growth Officer) Comp sales were a major driver of DTC growth, with modest new store openings in H1. E-commerce is performing exceptionally well, driven by higher conversion and loyalty. We expect continued strong performance in DTC for the second half, with increased store openings and sustained e-commerce growth.
Q: How are you managing the balance between top-line growth and better-than-expected gross margins with your SG&A guidance?
A: (Harmit Singh, Chief Financial and Growth Officer) We are focused on driving gross profit dollars faster than SG&A growth to achieve EBIT leverage. The increased marketing spend is strategic to drive long-term growth, and we are confident in our ability to manage expenses while fueling brand momentum.
Q: Are you committed to growing the US wholesale business in the back half? How are sell-out trends compared to last quarter?
A: (Harmit Singh, Chief Financial and Growth Officer) We expect US wholesale to improve sequentially, though our full-year guidance is not contingent on its growth. Sell-out trends are improving, and inventory levels are lean, which bodes well for the second half. (Michelle Gass, CEO) The US wholesale business is in a much better place than a year ago, with strong product performance and improved supply chain operations.
Q: Can you provide more details on the drivers of the DTC increases in each region, including square footage, comps, units, and pricing?
A: (Harmit Singh, Chief Financial and Growth Officer) Comp sales were the primary driver of DTC growth, with modest new store openings in H1. E-commerce is a significant contributor, with strong performance across all regions. Pricing increases were modest, with AUR growth driven by a mix shift towards premium products.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
