Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co First Quarter Earnings Conference Call for the period ending February 26, 2023. 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 at 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 first fiscal quarter of 2023. Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q1 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 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, particularly the Risk Factors section of our Form 10-K and the information included in our quarterly report on Form 10-Q that we filed today 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 measures are included in today's press release. Finally, the call in its entirety is being webcast on our IR website, and a replay of this call will be available on the website 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 the call over to Chip.

Good morning, and welcome, everyone, to today's call. Coming off 26% constant currency growth in our year-ago period, we’re off to a solid start to the year. We grew first-quarter revenue 9% in constant currency and 6% on a reported basis to $1.7 billion, while driving strong progress on inventory and advancing the key initiatives of our strategic plan. In our direct-to-consumer business, growth accelerated to 16% in constant currency, with record DTC sales, representing 42% of global revenues, 3 points ahead of last year. We delivered strong growth globally. Our international business grew 11% in constant currency, accounting for 56% of our total revenues. And even excluding the planned acceleration of wholesale shipments to support our U.S. ERP implementation, we achieved solid top-line results and exceeded our expectations for EPS. Our performance this quarter clearly demonstrates our strategies are working, driven by the strength of our brands, the growth of our direct-to-consumer business, and the benefits of a globally diversified business model. We continue to make progress against our three strategic priorities: leading with our brands, prioritizing our direct-to-consumer business, and diversifying our portfolio. Please note that for the balance of our remarks, Harmit and I will reference year-over-year revenue growth in constant currency. Starting with our first priority, leading with our brands. Beginning with the Levi's brand, we grew market share again this quarter, achieving share leadership in the U.S. amongst the key 18- to 30-year-old target consumer group, and we continue to grow share in women's denim bottoms, closing the gap to the number one position. In the quarter, the Levi's brand was up 9%, with our men's bottoms business delivering a record Q1 and women's bottoms achieving its highest revenue of any quarter. Men's bottoms grew 9% with growth across all geographic segments, and we continue to fuel momentum in women's bottoms, which grew 18%. We're planning a steady cadence of newness through the year, and we continue to lean into trends, like with our newly launched women's XL Balloon and Noddy's Food and the shift in rise from high to mid and wider leg openings, all of which drove solid growth in the quarter. 2023 is an important year for the Company, marking our 170th anniversary and the 150th of our iconic 501, the blueprint for today's modern blue jeans. As we celebrate the heritage of our namesake brand, we're using this important milestone to cement the next generation of Levi's pants. In February, we launched our largest coordinated global marketing campaign, 'The Greatest Story Ever Worn.' It kicked off during the Grammys where Bad Bunny also opened the show wearing a pair of vintage 501 and has helped drive nearly 3 billion impressions with consumers worldwide. After all these years, love for the 501 has only grown and continues to experience exponential growth, a solid proof point of the strength of the brand. Q1 net revenues were up 25% on top of 50% growth last year and revenues for the 501 this year are expected to reach close to $800 million, which is nearly 70% higher than pre-pandemic on a reported basis. As we move through the year, we're infusing energy and newness into our iconic 501 through new launches for him and her, inspired by historical fits. We also have a robust lineup of collaborations planned like our recent drop with the iconic streetwear brand, Stussy, which sold out in one hour, and an exciting partnership with NewJeans, the popular K-Pop girl band, furthering our ambition to engage younger consumers. Our global DTC business delivered a record quarter, up 16% versus a year ago, driven by positive comp sales and traffic growth across brick-and-mortar mainline and outlet stores in all geographic segments as well as e-commerce. Our U.S. DTC business also achieved another record quarter of revenue, with especially strong performance in our U.S. flagships and larger tourist destinations. We continued our store expansion in Q1, opening 25 Levi stores globally, including five mainline doors here in the U.S. The investments we're making to elevate our consumers' digital experience and strengthen their digital connection to our brands are paying off. Even with consumers returning to our stores in large numbers, our e-commerce business grew 14%, driven by broad-based global growth across all brands, including levi.com, which was up double digits. We continue to expand the breadth of our offerings online while improving the user experience. Our loyalty membership was also up almost 40% in Q1 to nearly 25 million members, and this continues to translate to a higher level of spend among loyalty members. Our direct relationships with consumers and continued strong performance in our international wholesale business helped mitigate the impact of softer U.S. wholesale revenue. Global wholesale grew 4%, driven primarily by Asia and Canada. In the U.S., we accelerated approximately $100 million of revenue from Q2 to Q1, primarily due to our Q2 ERP implementation. As a result, our U.S. wholesale business grew low single digits on top of last year's strong 25% growth. Additionally, while our core consumer has generally remained resilient, we continue to experience demand softness from value-oriented consumers, most notably impacting our Signature and Denizen brands. Regarding our diversification strategy, we continued the strong momentum we have achieved in each of our major growth opportunities with international markets, women's categories, tops, and our other brands, Dockers and Beyond Yoga, each contributing positively to the first quarter growth. International revenues were up 11% or 14% excluding Russia. Europe saw 6% growth, excluding Russia, with most markets growing, including our largest markets of France, the UK, and Germany, returning to growth. Asia continued its strong momentum, up 22% as we experienced growth across all markets other than China. In China, after the Zero COVID policy was lifted, we have seen a bounce back in traffic, with our latest results trending back to pre-COVID levels. Total company women's revenue grew 12%, led by strong double-digit growth in both the Americas and Asia. Our tops business grew 4%, following 16% growth last year, with strong performance in our DTC channel, up 12% for both women and men. Our other brands performed well in the quarter. Dockers continued to build momentum with net revenues up 29%, driven by broad-based double-digit growth across geographies and channels, with DTC especially strong. Dockers e-commerce remained robust with over 30% growth, in part supported by increased repeat customers and the brand's loyalty program, which is now driving over 30% of sales in this channel across the U.S. and Europe. Beyond Yoga continues to make solid progress with revenues up 11%, driven by DTC average unit retail growth and volume, and continued success with the brand's expanded line of dresses. Our first two stores are off to a good start, with two more planned to open in Q2, along with several further openings through the balance of the year. Finally, Michelle Gass has now been with the Company for 100 days as company President, responsible for the Levi's brand and our global commercial and digital operations. As I expected, she and I are working together really well with both of us determined to make this a very successful transition. She has, not surprisingly, landed great inside the organization, establishing her leadership very clearly on our business. Her deep retail and e-commerce experience is obvious to the organization, and she is already identifying both executional and organizational opportunities, which will help us accelerate profitable growth in our DTC women's and tops businesses. I was excited and confident when we hired Michelle as my eventual successor, and I'm even more optimistic about this company's future today than I was before.

Thanks, Chip. We achieved solid results in Q1 with sales up 9%. Excluding the benefit from accelerated U.S. wholesale shipments primarily related to the ERP transition, our business grew low single digits. Focus on our strategic initiatives and the structural shift in our business fueled our results, with our international business and direct-to-consumer channels driving almost 70% of the growth in the quarter. We made significant progress reducing our inventory, with total inventory dollars and units down meaningfully. We achieved this in part by taking deliberate actions to clear inventory in the U.S. as well as reducing receipts in H1, putting us in a stronger position as we move through the balance of the year. We remain committed to controlling costs with a focus on discretionary expenses while continuing to invest for the long term, including opening 18 net new stores and our ERP implementation in the U.S. following two successful implementations in Canada and Mexico. Despite the beat we delivered this quarter, we are maintaining our annual revenue and EPS guidance range, reflecting a cautious outlook on the macro environment, even as we remain excited about the momentum in our direct-to-consumer and international businesses and the progress we're making against our strategy. I will now provide more color on our Q1 performance and 2023 outlook. Net revenue increased 9%, driven by continued global momentum in our direct-to-consumer business. International revenues were up 11% with greater-than-expected results across most markets, while the U.S. was up 6%. Average unit retails were up mid-single digits, driven by broad-based growth across geographies, genders, categories, and brands. Our direct-to-consumer channel sequentially accelerated, with net revenues up 16%, driven by broad-based positive comp sales growth on top of extremely strong first-quarter comp sales last year, driven by higher traffic and higher volumes across geographies, including in the U.S. and Europe. Adjusted reported gross margin was 55.8%, 360 basis points below last year's record 59.4% but 120 basis points ahead of 2019 pre-pandemic levels. The deliberate actions that we took to reduce inventories in the U.S. that I mentioned a moment ago, coupled with a more promotional environment, resulted in greater-than-expected pressure on gross margin in the short term, but the inventory level sets us up in a stronger position as we move through the year. Gross margin benefited from price increases, lower freight expenses, and favorable channel mix, despite a negative 40 basis points impact from accelerated wholesale shipments. However, those benefits were offset by several transitory factors, including a 200 basis point impact from higher product costs, reflecting record cotton prices, higher ocean freight, and demurrage charges, as well as nearly 300 basis points impact from lower full-price sales. As we move through the year, the headwinds impacting gross margin should begin to recede, including from product costs given lower cotton pricing, freight and demurrage charges, as well as lapping lower full-price selling and unfavorable foreign exchange from H2 last year. Key contributors to our structurally higher margins that we have spoken to you about, such as favorable channel, geographic, and women's mix, will continue to benefit margins. Adjusted SG&A expenses for the quarter were $757 million, up 7% from last year, driven primarily by a four-wall investment in support of the higher DTC sales and advertising investment to support our 501 marketing campaign, for which the spend is skewed to the first half of the year. While adjusted EBIT margin came in line with our expectation at 11%, down from 14.9% last year, the decrease was driven almost entirely by the decline in our gross margin rate. Adjusted diluted EPS was $0.34, with a penny negative impact from foreign exchange. I will now take you through our key highlights by segment. In the Americas, net revenues grew 7% driven by the strength in DTC. The channel saw double-digit growth in the U.S. and achieved our second quarter of record revenue. Overall, Canada was up double digits and Latin America grew high-single digits driven by increases across nearly all markets in the region. Europe returned to growth, with net revenues of 6%, excluding Russia, on top of 21% growth in the prior year, driven by our DTC business. Geographically, growth was seen across most countries. Our largest markets, France, the U.K., and Germany were collectively up low-single digits, with Spain and Italy up double digits. Strong demand for the Levi's brand in Asia continued with revenues accelerating to 22% growth driven by all channels and markets outside China, led by India. Asia ex-China was up 28%. As Chip mentioned, we are seeing trends improve in China and now expect China to turn profitable this year. Asia operating margins also expanded 160 basis points to 18.5%, due to higher revenues and lower SG&A. Operating margin dollars were an all-time record. Now looking to our balance sheet and cash flow. As we've discussed over the past year, as we execute the ERP transition, and as a result of actions to reduce receipts in H1, we are rapidly reducing our inventory levels. Q1 inventory was up 33% on a dollar basis, a 25% sequential improvement from last quarter of up 58%. Core product represents more than 2/3 of our total inventory. We continue to expect sequential improvement quarter-over-quarter, with quarter two being substantially lower than Q1, and we expect levels to be in line with sales growth by the end of the year. Adjusted free cash flow was negative $272 million in the first quarter, driven by the timing of capital and the implementation of our ERP. As a result of this, we used our revolver to support our cash position, as we sequentially improve our inventory through the year. We expect free cash flow to turn positive, enabling us to pay back our ABL draw. Net debt was approximately $834 million and overall liquidity was $1.2 billion. Our leverage ratio remains strong, although it did increase to 1.4 times compared to 1.1 times at the end of Q1 2022 due to negative free cash flow. In the quarter, we returned approximately $56 million in capital to shareholders, including dividends of $48 million, up nearly 20% from the first quarter of the prior year. In Q2 '23, the Company declared a dividend of $0.12 per share in line with the last quarter. Moving on to our outlook, even though we exceeded expectations in Q1, given it is early in the year and macro uncertainty, we are maintaining a cautious stance and reaffirming our fiscal 2023 revenue and EPS outlook. We continue to expect net revenues between $6.3 billion and $6.4 billion, reflecting reported growth of 1.5% to 3% year-over-year, and EPS in the range of $1.30 to $1.40. While we're maintaining our guidance overall, the way in which we get the head change from previous expectations, we expect the strong momentum in our global DTC and international businesses to offset softer wholesale trends in the U.S. and Europe as retailers continue to be cautious with their open-to-buy. As a result, for the year, we expect nearly 60% of Levi's brand revenue coming from international and DTC, as a mix of our total business in the mid-40% range. Our DTC channel and international businesses are both fast growing with tremendous opportunity given our under-penetration in these categories and importantly our high gross margin businesses. In reported dollars, we continue to expect low single-digit growth in the Americas for the full year, as strong growth in our U.S. DTC business and Latin America will be tempered by U.S. wholesale. We are pleased to see Europe return to growth in Q1, driven by the strength, with trends coming in better than expected. The outlook has improved, but it's still within the previously guided range of low single digits. Based on the stronger trends we're seeing in Asia, we now expect low double-digit growth and improvement from mid-single-digit growth in our previous guidance. As I mentioned last quarter, we continue to expect 2023 to be a tale of two halves, with the first half weaker and the second half considerably stronger, given a number of factors, including the year we are lapping, promotional levels, record cotton prices impacting COGS in H1, and supply chain disruptions progressively getting better. I will now provide color on Q2 and the full year. For the second quarter, the over-delivery reported in Q1 will temper growth in Q2 but will not have an impact on the first half or full year. In Q2, we now expect revenues to be down high single digits to low double digits, given that we are in our ERP implementation and associated downtime and our ability to ship product in the U.S. in excess of what we have contemplated in our guidance is limited. Q2 gross margin is expected to meaningfully improve versus Q1 as a result of a higher contribution from DTC, but will be down slightly from last year, and we continue to expect SG&A to be up mid-single digits relative to a year ago. Regarding the full year, given the higher levels of promotion than we previously anticipated, we now expect the full year's gross margin to be down approximately 50 basis points versus the prior year's 57.5%. We remain confident that second-half gross margin will sequentially improve as headwinds moderate. We now expect the full year tax rate to be low to mid-teens versus our prior expectations of mid- to high-teens. Prior to Q&A, I'd like to make three key points. First, while we expect to face continuing challenges through the year, the strength of our brand gives us confidence in sustaining our top-line momentum, and our Q1 performance serves as a proof point that our strategies are working. Europe's return to growth, as well as our strengthening international performance and broad-based momentum in our direct-to-consumer business, are all fueling profitable growth. Second, gross margin will progressively improve as we move through the year and headwinds abate, and we expect to end the year with gross margins above 57% on our way to our long-term goal of 60%. Lastly, we will continue to focus on controlling the controllables by reducing discretionary spending while continuing to invest in growing DTC as we open new doors with growing comp sales and accelerated e-commerce. With that, I'll now go ahead and open the call for Q&A.

Thank you. The floor is now open for questions. Our first question comes from the line of Bob Drbul of Guggenheim.

I guess if I could just focus a little on inventories and gross margins to start off the call. On the inventory side, can you just talk about sort of where you ended up in the up 33 versus your plan? Where you think inventory levels are specifically at your U.S. wholesale partner levels? And then on the gross margin side, tying it together with the inventory, can you just talk about the expectations, I mean, Q2 gross margins versus your assumptions around the promotional activities specifically in the U.S.?

You asked the question that we thought you'd ask. So let's start with it. Overall, we made meaningful progress on inventory, as I mentioned in my prepared remarks, it is down meaningfully both in dollar and unit terms and is sequentially improving. If you could recall, we said when we reported Q4 that that's the peak and it gets better, which is what is happening. We do believe that the sequential improvement continues into Q2. And as I mentioned, inventory is largely clean. We did get rid of inventory to the extent we could, and that did hurt margins, but regarding inventory improvement, it's largely driven by the fact that we proactively corrected buys and were able to clear inventory. To your question about being driven by the U.S.? Yes, unequivocally. For example, inventory levels at the end of Q4 were up 90% year-over-year and Q1 is down to 35% year-over-year. So, it's a dramatic improvement in the U.S., and that's why we think it gets better progressively as the year progresses from that perspective. Regarding gross margin, the miss against our expectation was largely because we proactively were able to clear inventory, as well as promotional levels were slightly higher than we anticipated. Quarter one is not a great read if you look at it last year for full year gross margins. Record gross margins last year when there were very little promotions. Gross margins are at an all-time high at 59.4%. We ended the year at 57.5% a year ago and in terms of gross margins for the quarter, let's start with what I call the good components, and a lot of these good elements are going to be here for a while. For instance, we took prices about 150 basis points that we see continuing throughout the year. Then what I call the temporary factors will recede as the year progresses. 200 basis points is a combination of commodity; increased cotton in H1 was a barrier. Our product was affected when cotton was at an all-time high, along with some delayed costs, etc., is about 200 basis points. That begins to recede as we step into H2, but I think the tailswind is about, I would say, 170, 180 basis points because there is some inventory that we bought in H1 that we clear in H2. The rest is promotional levels which were much higher than a year ago. The two pieces: one, last year this time, we didn't really sell anything under full price. Now we're selling a little higher and then promotions. We expect and are conservatively anticipating that promotion levels continue through the year. So as you think about the year, annual expectation on gross margin, I think we're going to be about, relative to last guidance, about 70 basis points down at the end of the year, and that's largely driven by higher promotion levels, which we expect to be offset by better channel mix. DTC is going to be higher. International is going to be higher. Europe is rebounding nicely. So, I think that's how we're thinking about gross margins. And as you know, a large piece of what we sell is core. We brought a lot of newness into our assortment with the 501 150th anniversary and so all that helps. I hope that addresses your question, Bob.

Thank you. Our next question comes from the line of Matthew Boss of JPMorgan. Your question please, Matthew.

So maybe, Chip, could you just update us on the health of the Levi's brand, maybe what you're seeing in the U.S. and Europe marketplace today as it relates to the denim category? And then, Harmit, to your point before, any change in the pricing strategy just given the dynamic consumer backdrop out there?

Sure. So let me first talk about the category since that's part of your question. And I think you all know that the data that we get on a quarterly basis is U.S. only, still a major part of our business. We don't get the rest of the world on a quarterly basis. But sort of as we had thought, the category is back to growth again in the quarter, the most recent quarter, is up 1%. That's on top of a prior year quarter of up 16%. So if you remember in the last call, we talked about how coming out of the pandemic, we saw a big spike in denim. Then we had two quarters of kind of mid-single-digit softness. We're back to growth now, and that's good. That 1% growth in the category compares to what we reported in our U.S. DTC business with record volume, that was up low double digits. So we are clearly gaining share. We talked about it in the prepared remarks. We are now the outright leader in men's and women's 18- to 30-year-old jeans market after gaining one point of value share in the past 12 months and past three months, and we continue to grow share in women's denim bottoms, closing the gap. We are now knocking on the door, being the number one brand in the U.S. That has not happened in my entire 11.5 years at this company. We continue to have momentum while others are struggling. In terms of brand equity, a couple of things. I guess the first thing I would point to is just the strength of our overall DTC business, where we are in control of the brand and how we engage with the consumer, which shows in our business results. Our global DTC business delivered a record quarter. We were up 16% versus the prior year. We comped positively in all regions. Our e-commerce business was up double digits as well. I think that kind of speaks to how consumers are still coming to this brand. One other data point is as we do our brand equity studies around the globe; we do get a price perception for Levi's, and this is price perception, right? But Levi's jeans are viewed as being worth paying more for, for quality and longevity, and we are pretty well positioned to continue to navigate through this inflationary period. Lastly, I don't think we mentioned it in the prepared remarks, but our average unit retail was up mid-single digits again this quarter despite the promotional environment. On Europe specifically, Europe revenues were up 2%. I think we mentioned this in the prepared remarks that up 6%, excluding Russia sequentially, improving versus last quarter, again driven by the strength of DTC, which was up 16%, excluding Russia. Comps were positive every month across North and South Europe. They were also positive in the quarter in mainline and outlet stores, as well as e-commerce. Every market in Europe grew, with the exception of a couple of the smaller markets in the Nordics. Our largest markets, France, U.K., and Germany were all collectively up low-single digits, while Spain and Italy were up double digits. So Europe is performing a little bit better than what we thought it would going into the year, but it's still within the range of what we guided originally. The last thing I would say about Europe is, just like the U.S., we're pretty cautious about our wholesale business there as retailers are maintaining their open-to-buy budgets pretty close to their best given all of the macroeconomic uncertainty.

And Matt, your question about any change in pricing strategy; if the question behind the question is are we taking prices down? No, that's not what's happening. But we're not necessarily increasing prices in today’s environment. And so, we're promoting smartly, like most retailers. We're competitive, but we're not necessarily the number one in promotions. We have a lot of newness in our assortment. That’s how we are attracting traffic; for example, the organic items that we bring in, and we price thoughtfully. Overall, we are being mindful of the fact the consumer generally, especially in the western part of the world, is tightening their spending.

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

Harmit, you mentioned that you expect SG&A expenses to increase in the mid-single digits for Q2. Could you clarify your expectations for SG&A expenses for the entire year and how that might affect your operating margin guidance?

Yes. I would say low single- to mid-single on a full-year basis. And largely, the way we are thinking about SG&A, Jay, is wherever we can cut discretionary expenses, we are doing that. We have really tightened new hires, we have tightened things like travel, and this is business-related critical spending, etc. I think where we're spending the dollars is as we open new doors, we'll have, on a net basis, 80 doors this year between our three brands, and that is going to fuel the direct-to-consumer business, which is important. Advertising a little bit, especially with the 501 campaign and on basic infrastructure, like the ERP, which is being implemented as we speak in the U.S., as well as the distribution capacity that we're gearing up for the long term. So, those are the areas where the spending is going, which drives a little bit of the SG&A, but we will continue to tighten wherever we can.

Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo. Please go ahead with your question, Ike.

Maybe Harmit, can you talk a little bit more about the implications the ERP has had on U.S. wholesale? Just maybe specifically, can you quantify the dollars that were pulled forward into the first quarter and the dollars that will be pulled out of the second quarter? Maybe specifically, could you give us embedded in that down high single to low double, what is the U.S. wholesale decline planned in 2Q? And then any other color on U.S. wholesale, whether it's order books or planned in the back half, it would also be great.

Yes. Sure. Ike, when we were talking about a quarter ago, I think we had anticipated the timing of the ERP and the discussions we were having with our key customers; the range of the sales push between Q1 and Q2 would be about $80 million to $100 million. As we mentioned on the call, I think the timing is about $100 million between Q2 and Q1. I do want to thank our wonderful customers because they were able to work with us in getting this just as we worked through the timing of the ERP, which is currently being implemented. So our distribution centers, for example, are shut as we speak, and we are in the process of transitioning. I think, to your question about Q2, a large piece of the $100 million is what we actually took from Q2 and pulled it into Q1. So Q2 will be impacted because of that. That's why as we think about what to expect in Q2, we're guiding down high single digit, low double digit, which obviously also has a positive impact on gross margin. That's why we're saying gross margins will be down a little bit, not like what you saw in Q1. I think that's how we're thinking about it. We do expect the impact of the ERP to largely be in H1 because the ramp-up happens in May, which is the last month of the quarter, and by the time we get into quarter three, I think we should have this behind us. As you know, we have implemented the ERP in Canada and Mexico, and it is largely a very standardized module that is being implemented in the U.S., and the benefits are largely going to be in data insight and simplification for our operators. That's what we're seeing in the two markets, and that is the benefit that we anticipate. It is foundational to everything else we're doing, and especially as we grow e-commerce and we grow our direct-to-consumer business, this gives us the foundational base to accelerate automation and connect with the consumer much better.

Thank you. Our next question comes from the line of Dana Telsey of Telsey Group. Your question please Dana.

As you think about the performance of denim versus non-denim, what did you see there? And Chip, you've given out in the past what the overall apparel category, how that performed versus denim? What are you seeing there? And can you just expand upon with wholesale? How do you expect that to progress through the year? And is there a difference between department stores or the discounters and what you're seeing in order rates?

Yes, there's a lot there. First of all, you're right, I normally do give the apparel category, and I didn't this time, but I've got the number here in front of me. Apparel was up 2%. This is U.S. data again for Q1. Recall, I said that the denim category was up 1% off of a base of plus 16. Apparel was up 2%; I don't have what the base period is for total apparel, but it was up slightly ahead of denim, and that's consistent with everything we’re seeing and hearing that some of the more dressier categories are doing a little better. We're seeing that in our own business too. Our non-denim business has done pretty well. It was up low double digits as well, and some of our best-selling items right now are chinos and cargoes and things like that. We're seeing those categories move really well. What else was in the question?

Yes. So I think, Dana, you asked about our expectations for wholesale. As you know, or I just want to clarify, if you think of the U.S. wholesale business and the year we are lapping, that’s important. The first half, I think the U.S. wholesale business was up close to a little over 20%, 25% in Q1, 20% in Q2. And so we are lapping strong numbers. Our expectation for the year, and this is wholesale in total, is that our expectation for the year is down in the low to mid-single digits, but made up by our direct-to-consumer business. So, if you think of the business structurally, our direct-to-consumer business, which represents about 42%, but for Levi's is close to 45%, continues to get stronger. Strategically, that's really what we said in Investor Day. This is a business that should head towards 55%. It will strengthen, and the gross margins are better, etc. So, I think 2023 is a good reset here from that perspective. And it’s unfortunate what's happening in the Western world in terms of macroeconomics. But if the Company emerges structurally better at the end of the year, that’s a good thing.

Yes. The only other thing I would add on top of that, Dana, is in talking with our wholesale customers, virtually all of them are keeping their open-to-buy budgets pretty tight. Given the uncertainty, and I would also note that we are seeing pretty significant softness in our Signature and Denizen brands. That means the value consumer is really being squeezed. There’s definitely a bifurcation happening, where the lower-end consumer is making hard choices and either trading down or just not buying denim. But that middle-income consumer, which is the sweet spot for the Levi's brand, is doing well and is still buying denim, and that is driving the growth of the Levi's business, the growth of our DTC business, and the strength that we are seeing in our direct-to-consumer business.

Thank you. Our next question comes from the line of Paul Lejuez of Citi. Your question please, Paul.

It's Tracy Kogan filling in for Paul. I don't think I heard you talk about Q3, and I was just wondering if you're still expecting high single-digit sales growth there, and if you have anything like order books to support or give you confidence in that growth?

Yes. No. Tracy, it's good to connect. We don't, as you know, guide quarterly. We talk about the year. But if you do math, our H2 is up higher than mid-single digits. And so, we're bringing to progress this. What we've said earlier is a tale of two halves; the first half weaker, the second half stronger. It's also driven by the year we are lapping, but if you benchmark it to, say, 2019, the difference between the first half and the second half is not that dramatic. It’s just the year that we are lapping. Plus our expectation is that trends get a little better as the year progresses, and we will be able to work out all the inventory issues.

Great. And just on freight, I think you said airfreight was a tailwind, but ocean freight was a headwind this quarter. I guess it netted out as a headwind. I'm just wondering how you're thinking about those pieces of freight for the remainder of the year?

I mean, H2 becomes a tailwind for both pieces of freight, and that's how we're thinking through it.

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

Harmit, I just want to square away some math here. I think in your prepared remarks, you mentioned that DTC should be about mid-40% of the percentage points of the overall sales for the year. Does that imply global wholesale would be down high single digits? I might be off with the math, but just wanted to confirm, and if that's the case, how much of that decline is coming from U.S. wholesale? And then maybe drilling down further, I'm curious, I think last quarter, you mentioned that mass was down high teens. Just curious to know how it performed this quarter and how you’re thinking about it for the full year?

Yes. So the mid-40s is largely for Levi's. If you think of the Company, Dockers has about 30% of the business that is DTC, and Beyond Yoga is half the business. But if you think of the Company overall, we’re a little better than 42% at the end of the year. That's the projection. So if you do run the math, our view is global wholesale is down in the low mid-single digits and is largely the U.S. and Europe, where, as Chip mentioned, our customers are cautious in their open-to-buy. We are building that into our expectations and really focused on driving our direct-to-consumer business. If things change, you'll see that reflected in the numbers from that perspective. Yes. So the mass channel was down about 13%. And in quarter four was down 19%. It was lapping a 10% growth quarter in 2022. We’re planning it down low double digits. Again, we sell to two wonderful customers, largely Signature and Denizen, and they're cautious in their open-to-buy. The good news for us is one of the customers, we are taking women’s denim out of doors and really working with them to grow our Levi's Red Tab, and that does help premiumize the brand.

Thank you. Our next question comes from the line of Brooke Roach of Goldman Sachs. Please go ahead, Brooke.

I was wondering if you could talk to the sell-through trends that you're seeing in U.S. wholesale for the core Red Tab business and how consumer engagement with the brand at wholesale may be differing relative to the stronger trends that you're seeing in North America DTC? And then Harmit, can you clarify, is the more cautious view on wholesale a function of a more cautious open-to-buy? Or has there been a slowdown in sell-through trends versus your prior expectations that may be driving this outlook?

Yes. So March is, as you all know, a very difficult month to read because of tax refund checks and the weather. I think as we think about the quarter in April, for example, it's early days, but we've seen traffic come back, and things are looking a lot better. To your question about consumer engagement at wholesale, our direct-to-consumer business is a real representation of how the brand is showing up in our assortment, and that is doing well. Our cautious view on wholesale is largely due to the open-to-buy that we’re thinking is driving that decision. If that opens up, things get better, and that will probably also improve the promotional environment over time as inventories tighten.

Thank you. Our next question comes from the line of Alex Straton of Morgan Stanley. Your question please, Alex.

Just a couple on my end. First, I totally understand that promotions are higher year-over-year given the change in the environment. But I'm wondering how promotions changed sequentially in the latest quarter compared to the prior and maybe how you would characterize the broader environment there? And then secondly, just on inventory quickly. I want to understand if that inline by the end of the year with forward sales growth is a longer timeline than I think you may have previously communicated? I think most brands are saying they'll be clean entering the back half. So I'm just wondering what's different on Levi here?

Yes. Yes. Our view is we're going to be clean. We clean out today than we were a quarter ago. We'll be clean by quarter two. It's not about is the inventory clean? It's about our view on inventory; we think quarter to the growth rate relative to a year ago is mid- to high teens, slightly higher than what we anticipated a quarter ago, just given where U.S. wholesale is. But as you know in the U.S., the inventory is largely for, and so that’s guiding our thinking on getting inventory back to sales levels. Regarding the promotional environment, we’ve just been cautious; it’s difficult to predict. In our latest expectations of gross margins, we have built in a slightly higher promotional level in H2. Now, if that doesn’t pan out, obviously, that translates into higher gross margins, but that’s really factored into our expectations.

The only other thing I would add is keep in mind that the base period promotional environment changed pretty dramatically between the first half and second half. Last year, first half, there were all the supply chain issues, and a lot of people didn't even have enough products. So everything was being sold at full price. In the second half, it started to get a lot more promotional, so the year-over-year change is quite dramatic in the first half for us. The year-over-year change in the second half should have much less of an overall impact on the gross margin.

I think if you’re trying to understand, Alex, the progression of gross margin. Last year, Q1 was 59.4, and we ended at 57. To the point Chip was making, because it got more promotional as the year progressed: this year, Q1 is 55.8. 200 of that is really commodities, which get better as we step into H2. So that's why we think there is progression in gross margin getting us back to slightly over 57% as we close the year, plus I think the promotional environment gets better. It’s not going to be as promotional as before, but we’re building in some promotions in H2, which normally are not going to be as bad as Q1 and Q2.

Thank you. Our next question comes from the line of Chris Nardone of Bank of America. Your question please, Chris.

Two quick questions. On second half guidance, can you just talk about your confidence in maintaining that strong DTC momentum on a potentially lower promotional environment compared to the last second half? And then a quick question on Asia. You increased your guidance up low double digits, and that's on top of mid-20s percent growth last year. Is there any way you can elaborate on where you're seeing the most strength in Asia and how much is coming from new doors versus comps?

Thank you, Chris. Growing Asia remains one of our strategic initiatives. The past couple of years have been impacted by COVID and various countries closing, but I believe Q1 provides a good perspective now. While Q1 doesn't capture China's reopening, which began primarily in February, most Asian markets are seeing a strong start. We’re observing improvements in our operating margins and overall operating dollars in regions like India, Australia, and other South Asian countries. The quarter was positive, with strong brand performance and growth primarily driven by comparable sales, which is encouraging. We have not included any potential upside from the situation in China sustaining throughout the year. Regarding your other question, we believe Asia will maintain its momentum as the year progresses due to our strong brand and resilient consumer base, which tends to be younger. Last year, our direct-to-consumer sector faced a slowdown in the latter half, mainly from declines in Europe during Q3 and Q4. However, Europe has shown a rebound, and consumer strength there has exceeded expectations. Despite wholesale customers being cautious with their stock purchases, we anticipate that DTC growth will persist. Additionally, with our new Chief Digital Officer, Michelle is focusing more on enhancing our retail performance, which should yield benefits. There are clear opportunities for improvement, and as we optimize our strategies, we expect to see an uplift in DTC performance.

Thank you. At this time, I'd like to turn the call back over to the Company for any closing remarks.

Thank you, Latif, and I want to thank everyone for dialing in and for your questions, and we'll look forward to talking with you at the end of the next quarter. Thanks very much. Have a nice weekend.

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