Levi Strauss & Co (LEVI) Q4 2020 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Fourth Quarter Earnings Conference Call for the period ending November 29, 2020. This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available two hours after the completion of this call through February 3, 2021, one week after the call for the telephone replay. Please use conference ID 6963016. 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. I would now like to turn the call over to Aida Orphan, Senior Director, Shareholder Relations and Risk Management at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our fourth fiscal quarter of 2020. Joining me on today’s call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, CFO. We have posted complete Q4 financial results in our earnings release on our website. The link to the webcast of today’s conference call can also be found on our site. We’d like to remind everyone 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 the Annual Report on Form 10-K that we filed today, for the factors that could cause our results to differ. During this call, we will discuss non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in today’s earnings release on our website. Finally, this call in its entirety is being webcast on our website and a replay will be available shortly. 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 over the call to Chip.

Thank you, Aida. Good afternoon, everyone, and thanks for joining us today. Reflecting on 2020, I feel grateful and proud of our teams for their execution amid the challenges posed by the pandemic and other crises. From the beginning, we acted swiftly to protect our people, consumers, and business. We showed resilience and agility in unexpected situations while also planning for the long term. The efforts we've made this year give me great confidence that we will emerge stronger and more profitable. When the pandemic struck, there was significant uncertainty regarding the fiscal year. We navigated several scenarios, and I am proud to say we surpassed our internal expectations and delivered a strong performance, considering the circumstances. Our results confirmed the strength of our brand, the effectiveness of our strategies, and our ability to adapt to shifting consumer expectations. Many of the industry changes accelerated by the pandemic seem to be here to stay. Shifts such as the trend toward casual wear, increased focus on sustainability, and more conscious consumption align well with our strengths. Moving forward, we will concentrate on areas that significantly enhance our business performance, differentiate us, and create value for our shareholders: first, prioritizing our brands; second, adopting a direct-to-consumer-first approach and operating more like a vertical retailer; third, diversifying our business by driving growth in underrepresented areas; and fourth, continuing our digital transformation. First, let’s discuss how we will focus more on our brands. Levi's has a unique brand heritage and authenticity that has resonated with consumers for over 150 years. We are forging deeper connections with our consumers through our products, marketing, and both digital and physical experiences. By enhancing our brand, we can gain market share in denim while also increasing our presence in other categories. We are significantly the global leader in denim, maintaining a leading jeans market share in the U.S. and growing in women's markets in key European countries like Germany, France, and Spain. We are witnessing rising demand for our iconic products, like our original 501 fit, which saw an 80% increase across men's and women's on levi.com in Q4. At the same time, we are creating new icons and establishing denim trends. Our women’s fashion fits and high-rise styles continue to drive growth, and we're seeing increased strength in our newer relaxed fits. We aim to expand our lifestyle offerings and increase our share of closet in categories apart from denim bottoms, which remain largely untapped. We are advancing the casual aesthetic, recently launching Red Tab Sweats, a unisex collection targeting Gen Z, which sold out quickly. We plan to release a larger collection later this year. In Q4, we partnered with brands focused on sustainability like FARM Rio and other iconic brands like New Balance, which saw immediate sell-outs worldwide. Additionally, we have exciting collaborations lined up for 2021, including collections with the Italian fashion house Miu Miu and Valentino. We are looking to connect with Gen Z in innovative ways through social shopping and leveraging digital platforms. In Q4, we introduced our first-ever Instagram live shopping experience, enabling viewers to purchase showcased products directly on the platform. We also collaborated with Snapchat to launch the Levi’s Bitmoji collection, which engaged younger consumers effectively. Our brand and values reinforce each other, contributing to our strength. A prime example is our sustainability efforts, which were highlighted in our fall product line and marketing campaign and will continue into spring. We are making strides toward our science-based climate targets, with over 70% of renewable electricity currently used in our facilities aimed at reaching 100% by 2025, and being named one of only three apparel companies on the Carbon Disclosure Project’s A list. We are also innovating in sustainability, scaling cottonized hemp, and our Wellthread line introduced jeans made from recycled denim. In the coming year, we will continue driving sustainable and searchable products throughout our supply chain. From a channel perspective, we are adopting a direct-to-consumer-first approach, amplifying our investments in retail and e-commerce. Our DTC business growth will enhance our gross margins and overall profitability while allowing us to showcase brand strength and category expansion. Physical stores remain vital to our business, serving as experiential locations to connect with consumers and build brand equity. In Q4, we opened 21 next-gen stores that offer enhanced, digitally connected experiences, with five now in the U.S. These stores, along with smaller formats, yield higher returns on invested capital compared to average U.S. stores. We will keep expanding our retail footprint with a focus on these productive store formats. Our owned e-commerce business reached a record growth rate of 29% year-over-year and is now profitable. We expect growth rates to remain above pre-pandemic levels as we develop our omni-channel capabilities. Throughout the pandemic, we've expedited the implementation of several new omni-capabilities, including buy online, pick-up in-store, line-queuing, same-day delivery, and appointment scheduling. We improved store efficiency and consumer experiences with mobile checkout, enabling transactions with consumers on the sidewalk when store capacity was limited. We also introduced new payment options like Afterpay, which increased average order value for in-store transactions by 80%. Our ship-from-store capability has been expanded to Canada, the UK, and Germany, with plans to continue expansion in Europe early in 2021. Our loyalty program is also growing significantly, reaching close to 4 million members globally since its European rollout in Q4. We utilize AI to personalize benefits within our loyalty programs, resulting in meaningful growth in enrollments, revenues, and app registrations. Our mobile app's performance has surpassed expectations for average order value and engagement, driven by frequent exclusive collaborations and content, early product access opportunities, and personalized recommendations powered by AI. In Q4, the download rate increased by 65% compared to the previous quarter, with 70% of users being from Gen Z or millennials. Another focus area is diversifying our portfolio by promoting growth in underrepresented areas that enhance margins. I will share our progress and long-term objectives since 2015. In 2015, international sales made up 47% of total revenues; by 2020, this increased to 56% and is projected to reach two-thirds. Women's sales, which constituted just 20% in 2015, grew to 34% in 2020 and are on track to become half. Direct-to-consumer sales jumped from 29% in 2015 to 39% in 2020, with potential growth to 60%. Our tops business grew from 11% of total revenues in 2015 to 21% in 2020, with another 16% from other categories like accessories, footwear, and chinos. Over the next decade, as we achieve strong growth in tops and other categories, we expect half our revenues to come from products beyond denim bottoms. Our digital ecosystem, comprising both our sales and those of our customers, went from less than 10% of total revenues in 2015 to nearly a fourth in 2020 and we expect it to reach one-third by 2030, with our e-commerce constituting about half of that. Within wholesale, we are attracting new consumers through more digital and premium offerings. Our value products continue to perform well, with Signature being the top-selling women's jean on Amazon and experiencing double-digit growth at Walmart. Our rollout of Red Tab at Target is on schedule, expanding to 500 doors by fall 2021. We are also excited about our announcement of a limited-edition Levi's for Target collection featuring the brand in unique ways with an assortment of home and lifestyle items. As mentioned in Q3, we anticipate that our non-digital business with large traditional department stores will account for less than 10% of total revenue moving forward. However, our success relies not just on where we participate, but also on how we excel. We are undergoing a digital transformation across all operations, enhancing consumer experiences, increasing efficiency, fostering profitable growth, and minimizing costs. We are expanding the use of AI beyond consumer interactions, optimizing global promotions, assortment planning, and store labor scheduling. We are also digitizing our operations, having conducted virtual line assortment meetings that reduced physical samples by using digitized assortments with realistic 3D renderings. We are investing in digital tools to streamline our market entry processes. Before I pass it to Harmit, I want to reaffirm our commitment to making our world and workforce more equitable and inclusive. We have appointed our first Chief Diversity, Inclusion, and Belonging Officer, Elizabeth Morrison, to spearhead this vital work, and we plan to release our annual representation and diversity pay equity data later this year. I look forward to updating you on our progress. Now, I'll hand it over to Harmit.

Thanks Chip. Good morning, everyone. I hope all of you, your families and loved ones are safe and healthy. We had a very strong quarter and holiday season, both beating our expectations despite the resurgence of the virus and resulting store closures, mainly in Europe. Quarterly revenue comparisons to the prior year have continued to improve sequentially from 62% down in Q2 to 27% down in Q3 to 12% down in Q4. The structural economics of our business continue to improve as we reshaped our P&L with ongoing and outsized digital growth, continued improvement in gross margin and a reduction in base operating costs, while reallocating dollars to strategic choices that will accelerate growth. The fourth quarter was profitable and generated positive cash flow despite the double-digit revenue decline versus prior year. I’m very optimistic heading into 2021, as we continue to focus on executing our strategies with disciplined high ROI investments driving margin and cost productivity as well as working capital efficiencies. As I walk you through additional detail of our fourth quarter results, my comments will reference constant currency comparisons on a year-over-year basis in U.S. dollars, unless I indicate otherwise. We published the details of our results in today’s press release, so I will not repeat all of those here. The 12% decline in fourth quarter net revenues beat our guidance of a 14% to 15% decline, despite the adverse impact of unexpected store closures. Almost 15% of our global store base was closed in November, including about a third of our stores in Europe. Based on the trends we’re seeing through October, we estimate that closing our stores net to the amount we saw shift to online cost us approximately two points of revenue growth and $0.03 of EPS in quarter four. We also had a 53rd week and a Black Friday in the fourth quarter, which benefited year-over-year reported revenue comparisons by approximately 3 percentage points. Our total digital ecosystem, the combined revenues of the e-commerce sites we operate and the online sites of our wholesale accounts, comprise 23% of total company fourth quarter revenues, up from 15% a year ago. Total digital sales grew in the fourth quarter by more than 30%. Growth accelerated in November as we pivoted consumer demand in Europe to online. Specifically, our own e-commerce business grew 35% in quarter four and nearly doubled as a share of total company’s revenue to 8%. Our increased focus on our e-commerce business has enabled us to recapture about half the lost sales of our physical stores. And as I shared last quarter, e-commerce profit for incremental units is higher than wholesale. Adjusted gross margin expanded 30 basis points to 54.6%, the highest fourth quarter adjusted gross margin we have ever posted, again, demonstrating the intrinsic health of our brands and channels. Price increases and a higher share of sales from our direct-to-consumer channel were again the primary drivers. Levi’s AURs around the world rose slightly. Gross margin expanded significantly for both e-commerce and wholesale as we’ve tightened discounts and reduced sales to the off-price channel. Adjusted SG&A was down from prior year, a 9% decline. We’ve continued to deliver strong cost reductions across the board, primarily reflecting our structural cost reduction initiatives. We’re reinvesting a portion of the savings behind the areas driving our growth, namely DTC and technology. Other SG&A costs were slightly higher than our prior expectations, primarily due to higher variable costs on our revenue beat. Fourth quarter adjusted EBIT was $113 million, adjusted EBIT margin was 8%, and adjusted diluted earnings per share was $0.20 for the quarter, all higher than our expectation. Now, I’ll share a few highlights from our three regions. Fourth quarter revenue in the Americas declined 11%, slightly better than the company. Latin America was a bright spot in the region, especially our acquired Andes business, which grew in the quarter and through holiday. The full digital ecosystem in the region grew in the quarter. U.S. e-commerce growth rate accelerated through the quarter to 73% for the month of November, with the full quarter growing nearly 30%. And finally, the region’s operating income was really strong, declining only 8% on the 12% revenue decline. Europe was tracking slightly above prior year levels through October, demonstrating the resilience and strength of the brand we’ve consistently seen. Then the lockdown hit in November, which led to a third of our doors closing and the region’s quarterly decline of 12%. E-commerce growth rates continue to accelerate as we posted e-commerce growth of more than 50% for the quarter, which significantly increased in November to over 150% when we closed our doors. Our brand equity continues to grow, the most popular denim brand in Europe by far, Levi’s continues to gain share in the marketplace. The team in the region is getting experience with the COVID playbook, which combined with the consumers’ strong demand for the brand gives us the confidence that as the surge subsides and the lockdowns lift, we should snap back as we did after the first surge. Asia, as a region, declined 15%, a significant sequential improvement from last quarter as India began to reopen. Excluding India, the remainder of Asia was down 11%. The full digital ecosystem in the region grew in the quarter. China was nearly flat to prior year as DTC grew high-single digits, while reduced sales to franchisees to proactively manage inventory health. We’re increasing our investment and focus on Asia where the Levi’s brand has high brand awareness and we have a significant opportunity to accelerate sales growth. Turning to balance sheet and cash flows. Inventories at the end of the year, net of reserves, were 8% below prior year due to our revenue outperformance and disciplined inventory management. At year-end, inventory composition remained healthy with more than 65% able to carry over into future seasons. Our cost in working capital actions again yielded strong adjusted free cash flow in the fourth quarter, bringing full-year adjusted free cash flow to $141 million, a 22% increase over prior year. I’m particularly proud of how our entire organization raised the bar on cash management as we focused on managing through the different crises while emerging stronger. And while we prudently reduced our original CapEx budget of $200 million when the pandemic hit, we continued to invest behind high ROI growth initiatives. Full-year CapEx was $130 million, two-thirds of which went towards technology and a third to accelerate our DTC initiative. We continue to expand our store footprint, primarily internationally in Type A locations most digitally enabled and generally with rents at much better rates than we had pre-COVID. We opened 90 doors during the year and added another 85 doors from our organic acquisition, bringing total company operating store count at year-end to 1,042. We expanded our AI and data analytics team and continued automating and digitizing processes. And in late November, we successfully went live with SCP in Mexico, the first market in our global multi-year cloud-based ERP upgrade. The implementation was done remotely and the automation the system brings will greatly enhance the efficiency and agility of our team there. We are next moving on to North America starting with Canada. The fourth quarter brings to a close what has been a year like no other I’ve ever experienced. We have much to be proud of. Sales from our digital ecosystem accelerated through the year and it finished with full-year growth of 26%. Our own e-commerce is now profitable on a fully allocated basis a year ahead of schedule, and is generating a low-single-digit EBIT margin. We expect that EBIT margin in this channel should expand and ultimately track to parity with the company average as the business doubles in size in the coming years. We’ve delivered adjusted gross margin expansion of 60 basis points to 54.4% and at levels above our growth algorithm. We’ve executed structural cost savings of around $200 million collectively in headcount, rent, travel, and negotiated vendor savings, even as we continued to invest in initiatives driving growth. The strong gross margin and cost savings enable us to have only one unprofitable quarter and to deliver high-single-digit adjusted EBIT margins in quarter three and quarter four, despite double-digit revenue declines in this quarter. And we drove tremendous improvement in working capital. Before sharing thoughts on the year ahead, let me take a moment to discuss our holiday results. As a reminder, we define holiday as the combination of November and December. Both months were impacted by lockdowns and store closures. Adjusting for the impact of store closures, we estimate holiday revenue down 11%, better than Q4, with a much stronger December. We saw steady fundamental improvements through the holiday season. Revenue growth in our digital ecosystem accelerated to 33%, ahead of the market and growing our digital market share. Our own e-commerce remains profitable through the holiday period as we took a surgical approach to online promotion. And gross margin held strong, increasing in December as we tightened promotions. Regional colorful holiday included the following; in the Americas, holiday shopping started earlier this year, mid-October with Amazon’s pandemic Prime Day, which was a record for us in terms of Prime Day sales. And we kept discounts tight in a very promotional environment. And in Asia, those who direct-to-consumer returned to growth versus prior year with China and India both growing double-digits in December as the changes were made to the store fleet are starting to pay back. Now, I’ll share some thoughts on 2021. We run this business for the long-term and I’m very confident in our strategy. But as we’ve all seen, things can change suddenly in this environment. And unprecedented events require a quick and unprecedented action. Given the very low near-term visibility, we’re taking the approach of planning our 2021 fiscal year one-half at a time. As the year unfolds and we gain more visibility, we’ll update our outlook. In terms of revenue, we’re expecting first half revenue growth in the range of 18% to 20% versus 2020. And based on the underlying strength of demand for our brands and assuming conditions improve as the vaccines roll out, we continue to believe that revenues should return to pre-pandemic levels during the second half of the year, with Q4 of 2021 the first full quarter with revenues above the comparable quarter of 2019. And there could be markets across the world where this happens earlier such as China or Europe. With respect to Q1 2021 specifically, we anticipate first quarter revenues will be down high-teens in constant dollars compared to Q1 of 2020. In addition to the fact we’re lapping a really strong quarter wherein the COVID impact was minimal; the comparison will be adversely impacted by two significant factors: First, Q1 of 2020 had a Black Friday, which will adversely impact the Q1 2021 growth rate by 2 points. Second, store closures have increased. Currently about 17% of our global store base is closed, including about 40% of our stores in Europe. We’re assuming these store closures will continue through the remainder of Q1 2021 and we expect this will cost us 6 points or 7 points of growth. Turning to gross margin. We expect first quarter adjusted gross margin will be about 100 basis points higher than last year’s record of 55.7%. This is driven by the accelerated shift of our business towards international DTC and digital, combined with the benefit of price increases being less promotional, operating with a healthy inventory, and incremental COGS saving. In terms of adjusted SG&A dollars, the structural cost savings we took against our pre-pandemic run rate will take us all the way back to right around Q1 2019 level despite higher investment behind our strategic growth initiative. We anticipate our first quarter tax rate in the high-single digits and first quarter adjusted diluted EPS in the range of $0.20 to $0.24. We estimate EPS would have been $0.10 to $0.12 higher if it weren’t for the store closures. Uses of capital in 2021 include full-year CapEx of around $210 million. Two-thirds of the investment will go towards technology in areas like e-commerce, omni-channel initiatives, AI, data analytics, and the SAP upgrade. In terms of DTC brick-and-mortar, we anticipate opening around 80 stores globally. Most of these will be international, with the biggest share in China. In the U.S., we plan to open around 15 full-price next-gen doors in 2021, which would take a smaller footprint, mainline door count, in the U.S. to above 25 on our way to 100. I’m also pleased to announce that we are reinstating our quarterly dividend payment at $0.04 per share based on our positive cash flow and our continued confidence that we are emerging stronger. If business trends continue to improve, we’ll consider increasing quarterly dividends as we move through 2021. And finally, with respect to our current levels of debt, we intend to pay back much of what we borrowed last year. We’ll take a call on the timing and amount of the paydown as the year progresses and visibility improves. In summary, the store closures are unfortunate, but that’s outside our control. The business within our control is really strong and our now profitable e-commerce business is recovering a good portion of the lost store sales. As a result, we remain confident about our path to revenue recovery once stores reopen. When revenues do recover to pre-pandemic levels, we expect to be a much stronger, more profitable business with annual adjusted EBIT margins at 12% plus, notably higher than 2019’s 10.6%. This will be driven primarily by a much stronger gross margin while we reinvest in accelerating the shift to DTC technology and other strategic growth initiatives. As we navigate and emerge from these uncertain times, we have committed to driving profitable growth and returning capital to our shareholders. With that, we’ll now open it up and take your questions.

Thank you, sir. This concludes today's Q&A session and today’s conference call. Thank you for participating. You may now all disconnect. Everyone have a good day.

Great and congrats on the nice quarter, guys.

Thanks, Matt.

Chip, maybe near-term, any comments post-holiday on the organic trends that you’re seeing in the marketplace that was helpful color on November, and in particular, the acceleration that you saw in December? And then secondly, larger picture, I guess when we incorporate the increased casualization, distribution remapping and the permanent cost saving that you guys have spoken to, help us to think about the pre-pandemic annual targets of mid-single digit, top line, and 40 basis points to 50 basis points of gross margin as we think following the crisis?

Okay. Both great questions. As we said in the prepared remarks, we were pleased with the sequential improvement in our business really from the time the pandemic started, but importantly in the fourth quarter and through the November-December holiday period. So, we feel really good about that progression. We’re not going to really talk about January since we’re in the middle of that quarter, but you all have probably seen the NPD and other data that’s out there that seems to indicate a lift in the apparel sector overall, driven in part by the stimulus checks. So, we’ll see how that plays out. But we feel really, really good about the progression in our business, the pivot to digital, the lift and the positive trends on our e-commerce and digital ecosystem as all real positives that we think we’ll be able to sustain through the rest of the pandemic and as we emerge from this crisis. With respect to the growth algorithm and Harmit may want to pile on here a little bit, we need a little bit more time to digest it. We’re sticking with our growth algorithm as it is with the exception of the fact that we believe we’re going to be able to get to that 12% operating margin North Star much, much quicker with the cost actions that we’ve taken and believe we can sustain that when we get back to pre-pandemic levels of revenue we feel pretty confident whether we’re going to be in that 12% operating margin range and – but in terms of the actual growth component of the algorithm we need to see how that really plays out. Clearly, some of the trends during the pandemic play to our advantage. And if they sustain that may translate into a different growth algorithm at the end of the day. If this shift towards casualization, we continue to see really good progress in the diversification of our business. So, we feel really, really good about where we are. But I think it’s premature to say that the growth algorithm is going to change.

Yeah. I think what I’d build on, Matt, pandemic to getting back to pre-pandemic norm, there’s going to be – what we are seeing as a structural shift in the business. The business is structurally much stronger, more digital, more DTC, more international, more women. And the structural shift is helping our gross margin, especially as we really fine-tune discounting. You’ve seen that bear out in 2020. You’ve seen that bear out in our Q1 guidance on gross margin. And then, structurally, we’re tightening costs, right? And the question then is, what happens post-pandemic? I would say, the business is structurally stronger, wholesale is structurally healthier, and I think once we are at that stage or close to that stage, to Chip’s point, we’ll fine-tune our growth algorithm. But it’s probably going to be healthier and stronger if trends continue, which favor us right now.

That’s great color. Best of luck.

Thanks, Matt.

Good evening. Thank you for taking my question. My first one, I wanted to ask, given the gross margin strength you’re seeing and going to see next quarter, the price increases you’re seeing, and the brand’s pricing power looks really strong, how do you think about leveraging that? Are you evolving your product lines for more premium products or premium channels? Help me reconcile that pricing power we’re seeing in the brand, also the fact that you’re also sounding really bullish around Target and Amazon and Walmart? Help me reconcile those two elements. And then I have one follow-up. Thanks.

Okay. I’ll take that. I do think – I’ve always said that gross margin is perhaps one of the greatest indicators of brand health and brand strength. And our gross margin is very, very strong right now. And we’re optimistic as we go forward. One of our big focal points, as we’ve talked before, Omar, is elevating the U.S. market. The U.S. is still by far in a way our biggest market and it skews to wholesale. But we’ve been on a really intentional march to elevate in this market, more premium distribution, our customers like Nordstrom, more mainline doors, which we talked about pretty extensively over the last six months where we really do believe we’ve got significant opportunity with this intend to add about 100 doors over the next couple of mainline doors over the next couple of years. These smaller footprint stores, we’ve added a couple more in the last six months. The evidence is very, very clear that these stores are outperforming our total fleet – our total mainline fleet. So, we feel really good about that. So, we do believe we’ve got a mixed opportunity to mix more of our business up into Tier 2 into our better product, if you will. And we still have pricing opportunities. We’ve taken pricing a couple of times over the last two years and haven’t really had to roll anything back. It seems to be sticking. So, mixing more positively to more premium products is important for us, mixing our distribution as we remapped our wholesale distribution, especially here in the U.S., we’re doing that with an intentional eye on mixing it more positively. Small fun fact on Target, even though they’re a mass retailer, the assortment inside Target is very, very tight, but the AUR is going out the door at Target are higher than the U.S. wholesale average AUR. So, it’s helping us to premiumize in this marketplace. And when you look at the pad, it’s a real premium expression of the brand. So, we feel really, really good about this intentional march that we’re making to premiumize and drive higher AURs through pricing and mix. And that’ll translate to gross margins as well.

Got it. That’s super helpful, Chip. And then, one follow-up. As you think about the debate of wholesale versus direct-to-consumer, how are you guys thinking about owned e-commerce versus the kind of wholesale.com? Which one is growing faster? Do you have a preference or are you agnostic? And then, what’s kind of the bottleneck keeping your own e-commerce from being a much higher percentage of the business? I think you said 8%, which was similar to last quarter. Some of the benchmarks out there are as high as 20% even 30% in terms of brands out there. Thanks.

Yeah. I mean, first of all, let me say, right upfront we’re, you know while 8% is double where we were a year ago, we’re definitely not happy or satisfied with where we are because we do look at a number of other peers where their mix is significantly higher. And we’re working really diligently to see how do we accelerate it even beyond that. We have started looking at and reporting, as you know, our total digital ecosystem, which includes the pure plays and wholesale.com. We think it’s important to look at that in the total context. I am somewhat agnostic. Although having said that, I want that direct relationship with the consumer. So, if you put a gun to my head and say, pick one, I’d much rather have a consumer buying off of Levi.com than other places. But at the end of the day, I want that consumer to buy Levi’s. And so, we do look at the total ecosystem. We want the entire ecosystem to rise and we want to rise with that. So, we’re continuing to invest in building new capabilities on our own e-commerce site. We talked about the app. We’ve talked about the loyalty program. All of these things, I think, are going to contribute to us driving that revenue on our owned e-commerce higher in the years ahead.

Great, Chip. Thanks for the insights. Appreciate to understand where you head there.

Thanks a lot, Omar.

Hey. Good evening, guys. Just two quick questions for you, and then I have one follow-up. The first one is, when you talk about China, I just wondered if you could give us just an update on the percentage of the sourcing from China these days. And I think at one point it was like 8% a few years ago, I just want to see where it is today. And I guess, is the reset there largely complete and are you looking for more robust rates of growth in 2021?

So, I’ll take both of those and I’m going to try to be pretty quick just recognizing how many people are in line here. With respect to imports from China into the United States and mitigating any risk there, trade or otherwise, our imports into the U.S. from China now is less than 1%. And you’re right, it was 8%. And if you go back, it was 8% several years ago. And if you go back even further, it was more than that. So, the supply chain team has done a great job mitigating any trade-related risks or other risks with imports from China. We’re in a really good place there. With respect to our business in China, we are not completely done yet. We’re making really good progress. The results in our owned and operated stores have been strong here recently. If you look at our business a couple of years ago, 70% of our business was done through franchise partners. That’s now down to 50%. 50% is company-operated. We’ve built a couple of these big beacon stores, as we’re calling them, in Wuhan and Shanghai. We’re excited about what that will do from a branding standpoint. And over the last two years or so, we’ve closed more than 200 doors. We’ve closed franchise partners and/or shifted to other franchise partners. So we still have some work in front of us. It’s not over yet, Bob. I wish I could say that it was. We still have a little bit of work ahead of us. But we’re really optimistic based on the results in our owned and operated retail stores and some of our better-performing franchise stores. And I expect by the time we’re kind of into the second half of this year or getting close to exiting this year, the hard transformation work from a customer standpoint and channel standpoint will be behind us.

Got it. Can I sneak in one more, Chip?

Quickly.

I know. So, I guess, when you look at the comfort clothing, casualization a little bit, there’s some talk around baggy jeans making a comeback and anti-skinny jeans. Is that something you think you guys are seeing or can benefit from over the next few months and quarters?

Yeah. Actually, the line that we – we launched a loose-fit line this past season. It’s in our stores now on both men’s and women’s as sort of a loose straight fit off to a very, very fast start. So it is definitely something that not only are we seeing it. I think we’re kind of leading this trend, to some extent. And I think it’s here to stay. I don’t think skinny jeans is ever going away on the women’s side of the business. But there’s definitely a trend towards more casual, looser fitting clothes in general and same is true in jeans. And we’re seeing our loose straight fits performing really well over the last couple of months.

Great. Thank you very much. Good luck.

You bet. Good talking to you, Bob.

Thank you. Our next question comes from the line of Paul Lejuez from Citigroup. Please go ahead.

Hey. Thanks, guys. Just want to talk about the EBIT margin guidance for next year, the 12% or more. Just curious I’m sure you’ve got a range of revenue outcomes. And I’m curious just thinking about the flexibility in the model, what’s the minimum level of sales that you would need to kind of hit that 12%? Just curious about your ability to kind of manage through various scenarios. And just curious if you could maybe give a little color on what you’re seeing in terms of order books from your U.S. department store customers versus the Targets, Walmarts, Amazons of the world, and just to get a sense of how they’re thinking about inventory management and forward purchases? Thanks.

Paul, on the operating margin, I think, we remain consistent to what we said earlier, which is, when we get to 2019 levels, we feel good about delivering 12%-plus operating margin. And that continues to be a combination of accretion in our gross margins. You’ve seen that happen even in the pandemic here. We’ve guided a decent number. The gross margin accretion is largely driven by two factors, one is the channel and geographic mix, which is higher gross margin and the second is driven by the higher AURs, which is a combination of price and lower discounting. SG&A, our view is returns back to 2019 levels after all the costs that we’ve taken out net of the investments we’re making. To your question about the order book from our customers, what we’d say and the inventory levels, we’d say inventory – health inventory is very similar to health inventory at the company. It’s largely core. You can carry season to season with a third – that’s seasonal. We feel good about inventory. The order book, we don’t get into the order book, but our view is that it’s largely the store closures, thanks to the virus resurgence that’s causing the decline in sales. I mean, Europe, for example, as I mentioned in the prepared remarks closing the doors in November. We were already beginning to track higher than 2019 levels at the end of October. So, we feel the strength of the brand is really strong and our product lineup is really strong. So, we feel confident about emerging from this strong, especially as the casualization trends continue.

Got it. Thanks, Harmit. Good luck, guys.

Thanks, Paul.

Thanks, Paul.

Thanks. Good afternoon. Chip, I just wanted to follow-up on the goal of moving to half of the business. I know you’ve talked over the years about tops, maybe if you could just rank the opportunities that you see between accessories, footwear, chinos, other categories, how do you get to that half goal?

Well, the half goal is kind of a throw down that I put out to the organization to say how do we continue to drive diversification in a, I think, big kind of way. And when you look at all of the different categories where we compete and where we still have sizable upside opportunity, I think we can get there any number of ways. But clearly tops today remains one of the biggest opportunities for us. I jokingly say, we don’t buy market share data on tops because even though it’s now 21% of our revenues, I don’t think we’d scratch a 1% market share in tops. So, lots of upside opportunity there. Outerwear continues to be a big opportunity for us as well. And then, non-denim bottoms, which kind of comes and goes, but we talked in the prepared remarks about doing this sweat capsule, sweat suit capsule that we did earlier in the fall. And that went really, really well. And if you look at what the kids are wearing today that’s what they’re wearing. And that represents a significant opportunity for us as well. So, I’m not going to try to rank order one through five, which one’s the top priority because they’re all big opportunities for us and we have different parts of the organization really focused on it. So – but we are – part of our story over the last four years has been the diversification of the business for five years. We talked about it in the script, the progress that we’ve made in some of these categories. And we’ve set kind of ambitious targets for the next 10 years that if we achieve those, half of our business will be in denim bottoms and half will be in everything else. And that will be a really good outcome because it really does expand our portfolio and our share of total closet.

Thank you.

Thank you. Our next question comes from the line of Jay Sole from UBS. Please go ahead.

Great. Thanks so much. Chip, I want to ask you about the next-gen stores. I think, the numbers that you mentioned that if you see the business being 60% DTC over time and it sounds like about a quarter of that would be e-com, it suggests there’s a big piece that’ll be full-price stores and outlet stores. Can you talk about the percentage that you see of the business being full price versus outlet and how the next-gen stores fit into that goal?

Yeah. It’s kind of interesting. It’s a good question, Jay. If you look at our business around the world today, here in the U.S., our retail footprint still skews very heavily to outlet. And the outlet model has historically been made for outlet. In Europe, our businesses skews more towards mainline stores, and Asia same way. And so, one of our biggest opportunities is to change our retail footprint here in the U.S., which is this mainline opportunity. So, these next-gen stores, by and large, they are smaller-footprint stores, the 2,500 to 3,500 square foot store. And we believe – and they deliver a really good return on investment. I mean, we now have a couple of dozen of them up and running around the world, and they are outperforming our fleet. We have a high degree of confidence in our ability to execute these stores, smartly assort them, using data science to assort these stores down to the door level. And when you think about all the white space that we have just in the U.S. alone, I mean, I keep saying we have no stores in Boston where there are a quarter million college-age students and hopefully sometime soon I may be talking about the new doors we’re going to be opening in Boston. But we have huge wide space opportunities here in the U.S. to shift the mix more mainline and it helps to premiumize the market, which I talked about earlier. It helps to elevate the AURs in the market earlier that I mentioned earlier. And so, that really is the path that we are on.

Got it. And then, maybe just one quick one. On the next-gen stores, do you see them as mall stores, as street stores, I mean, do they have the ability to sort of go in different types of locations?

We’re not in many indoor malls today here in the U.S., which is the good news. We have very limited exposure to malls. And many of these stores are in kind of outdoor lifestyle malls, if you will. And they can also be street level stores. So, it’ll be a mix, but we’re really focused on A locations, we’re capitalizing on lease opportunities that are out there today where we’re getting great rates relative to pre-pandemic rates. And these kind of stores can really go anywhere, but we’re really not going to expose ourselves very significantly to indoor malls.

Got it. Okay. Thank you so much.

You bet.

Thank you. Our next question comes from the line of Laurent Vasilescu from Exane BNP Paribas. Please go ahead.

Good afternoon. Thank you for taking my question. Harmit, I think you mentioned Europe as of October it was kind of like it was up year-over-year just slightly would suggest to me, and tell me if I’m wrong here, but November might have been down 20%-plus to get to that 9% for the quarter. Is that the right way to think about it? And how do we think about Europe for the first quarter? And then, on the flip side, how should we think about Asia for first quarter as you start to anniversary the COVID impact in Asia called out on last year’s fourth quarter?

Yeah. I think, good question. I don’t have the specific November number, but I think your math is fairly close. I’d say, December, Europe actually started fairly well. We had stores open. And then as we closed December, it went back towards the third of the doors open. January, we have probably at this time, 40% of our doors are closed. And you would think of where we get the business because every country, they’re different in different places on the lockdown. If you think of where we get the business, about 50% of our business is Europe in terms of the doors we have across franchise and ours is closed. And as things get better, we believe, you know we’ll come out of it pretty quickly. On Asia, sequentially our business has improved. And as I mentioned as we started December both China and India reported double-digit growth. So, I’d say, Asia – and also because if you think about our quarter one, our quarter one largely had no impact for COVID other than China and other than one month in China. So, sequentially it probably gets a little better as we think about the quarters.

Very helpful. Thank you very much.

Thanks, Laurent.

Thank you. I show our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead.

Great. Thank you so much. Great call, and really good color, particularly through the holiday season. So thank you so much for that. I wanted to ask one question about Q1 and then one just about, kind of, longer-term margin puts and takes. In the first quarter, Harmit, I think I heard you say down high-teens. You said in constant dollars, and I just want to make sure I understand what this means. Is this as reported in dollars? Is this constant currency? And how – what would that mean for the report that we’ll see in dollars? Let me just clarify that one first.

Yeah. I know it’s – it’s Kimberly, good call-out. This is in constant dollars. Reported currency should benefit us, I think, in revenue if the rates are where they are today by about 2 percentage points and I think slightly more benefit on EPS. So, we should see some benefit on a reported basis in Q1 because of currency.

Okay. Wonderful. Thanks for that clarification. And then, it’s very intriguing. It sounds like you would expect to get back to revenue parity with 2019 in the back half of this year. And I’m wondering if – how we should think about the margins, particularly in Q4, for example, as we get later this year. Should we think about a 4Q margin, for example, that’s above 4Q 2019? And then, you’ve phrased it as sort of 12%-plus in your out-year target on adjusted operating margin. Maybe you could just dive a little bit into the plus. What are the opportunities for margin to actually go above that level? Thanks so much.

Yeah. I think, in terms of Q4, so if you think about gross margins being the prime driver of the EBIT margin, I would just use the same seasonality on gross margins as we have seen over the last few years, Q2 and Q3 are weaker than Q4, for example. Q4, we feel assuming the virus doesn’t rear its ugly head further, we feel comfortable that we can get to 2019 levels of revenue and accompanying that will be EBIT margins of 12%. The 12%-plus is primarily going to be driven by the pace of acceleration of our gross margin. And structurally things tend to go the way they are than we could get a higher rate of growth, as well as the curtailment of base – we feel good about curtailing our base costs and that’s why we indicated that we feel good about getting back to 2019 levels of SG&A. The question really is going to be about, do we continue to invest in our growth initiatives that we have talked about that structurally enhances business for the long-term or not? And that’s why rather than giving a number at this stage, we have set a 12%-plus. If you’d asked me, when I joined the business eight years ago, I’d say, the goal was to get to 15% and then DTC happened and e-commerce happened and a whole bunch of other things happened. And so, we decided to invest and grow the business. And so that’s why one is being a little cautious at this point, but we feel good about getting to 12% and then going from there over time.

Great color. Thank you.

Thanks, Kim.

Thanks, Kim.

Fantastic. Thanks so much for getting in the question here. I have two for you and perhaps related. The first one was on the loyalty program. So, you mentioned that you were up to 4 million loyalty members. I wonder if you could share any metrics of the superior performance associated with those customers, anything from the order value, higher frequency of engagement, and if that’s just higher, do they shop more in the DTC channel? Anything you can share on that front and the potential for that program would be great.

So, I’ll take a shot at this, Alex. And good to talk to you. Happy New Year as well. So, on the loyalty program, we’re still in very early days. We do have 4 million members. We launched it in Europe in the last quarter or so. We have 2 million members in Europe and 2 million in the U.S. We are using the loyalty program to personalize opportunities for every single member. But we do have some early metrics here and we’ve run through a couple of them. Our loyalty members’ lifetime value is 27% higher than non-members. Total revenue from loyalty transactions is up 193% over Q3 and consumer shopping in two-plus channels within the quarter was up 26% over Q3. So, we’re actually seeing these loyalty members be also more multi-channel shoppers. So, again, it’s kind of early days and we’re using data science to power all of the personalization and everything else. And we’re trying to learn quickly, reapply those learnings and go from there. But we’re really happy with the early start that we’ve got. What was your second question again?

Just any thoughts on market share...

Market share, right, right, right, right. Yeah. So, I mean, our biggest – we’re number one in men’s, number one in women’s globally, number one brand globally. We’ve made good share progress on our women’s business, primarily in Europe. Over the last year, we’ve gained market share in a couple of the critical markets in Europe. I would say, in the last quarter here in the U.S., our women’s business actually fell back a little bit. We lost a share point. And that was because we decided not to get overly promotional. We lost a share point to Old Navy who was very, very promotional and we just decided to not go there for the sake of maintaining the strength of the brand. We’re confident we’ll get it back. And – but we continue to believe we’ve got opportunities across both the men’s and women’s business. Obviously, when you’re the biggest player, the probability of losing share is higher than your probability of gaining share, but we’ve demonstrated our ability to gain share here over the last couple of years. And we believe part of emerging is stronger when we declared we’re going to emerge stronger. Part of it is coming out of this with share gains. And we have a number of weak competitors and we think we can capitalize on that as we go forward.

Fantastic. Thank you for the color today.

Thanks a lot, Alex.