Levi Strauss & Co Q2 FY2025 Earnings Call

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Second Quarter Fiscal 2025 Earnings Conference Call for the period ending June 1, 2025. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet, and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our second quarter fiscal 2025. Joining me on today's call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q2 financial results in our earnings release on the IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd like to remind you that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular, the risk factors section of our Form 10-K for the fiscal year ended December 1, 2024, and the MD&A section of our recently filed Form 10-Q for the factors that could cause our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today's press release. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable efforts due to the challenge in quantifying various items, including but not limited to, the effects of foreign currency fluctuations, taxes, any additional U.S. tariffs or responsive non-U.S. tariffs, and any future restructuring-related severance and other charges. This call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers, unless otherwise noted, and information provided is based on continuing operations. And now I'd like to turn over the call to Michelle.

Thank you, and welcome, everyone, to today's call. I'm pleased to share that we delivered another standout quarter exceeding expectations across sales, margins, and EPS. We saw broad-based revenue growth across channels and categories as well as strong margin expansion driven by the consistent execution of our strategic priorities. We arrived at the midpoint of 2025 in a strong position with the confidence to raise our top and bottom line outlook. Harmit will share more on our guidance later in the call. In Q2, we delivered another quarter of high single-digit organic net revenue growth, up 9%. Direct-to-consumer was up 10%, reflecting the 13th consecutive quarter of positive comparable sales growth with strong and increasing profitability across channels. Our wholesale business delivered another quarter of growth, up 7%. Our U.S. business maintained solid momentum up 7%, while international was up 10%, driven by outstanding results in Europe. And we continue to see strong performance in our core as well as outsized growth in our key focus areas like women's and tops. As we reach the midpoint of the year, I'd like to take a step back and reflect on the progress we've made transforming the business over the last 18 months. First, we've made significant strides in accelerating our shift toward becoming a DTC-first business across both brick-and-mortar and e-commerce. Today, our owned and operated channels represent over half of our business, and they continue to deliver consistent, healthy comps alongside improving profitability. This progress reflects our disciplined shift toward becoming a truly consumer-led DTC-first retailer. Second, we are making measurable progress in our evolution from a denim bottoms business to a full head-to-toe apparel lifestyle brand. While maintaining our dominance in jeans, we continue to drive outsized growth in lifestyle categories, including tops, dresses, outerwear, and non-denim bottoms. Importantly, we've expanded our assortment with greater discipline, rationalizing SKUs and introducing newness that is delivering stronger productivity and higher full price sell-through. These choices are key drivers of our sustained market leadership and rising AUR. Third, we're narrowing our focus. As shared in May, we announced the sale of Dockers, which followed our decision to exit our Denizen and footwear businesses. These bold strategic choices are enabling us to deliberately distort focus to the Levi's brand, putting brand equity, consumer connection, and category leadership at the center of every decision. Fourth, underpinning this transformation is a sharpened ability to operate with rigor and execute with excellence. From go-to-market acceleration and streamlining store operations to end-to-end supply chain efficiencies, we are rewiring how we work, embedding structure, discipline, and cross-function alignment at scale. These foundational shifts are unlocking growth, enhancing profitability, and enabling us to better serve our fans as we make progress toward becoming a $10 billion company. While the global operating environment has become more challenging with uncertainty around tariffs and broader consumer behavior, we are navigating this period from a position of strength. I'll now walk you through highlights from the quarter in the context of our strategy. Note that all numbers that Harmit and I will reference are on an organic, continuing operations basis. Let's start with our first strategy, being brand-led. The Levi's brand continues to resonate with fans around the world, growing 9% overall with 6% growth in men's and 14% in women's. Our unaided brand awareness and consideration remains best-in-class with our scores significantly increasing year-over-year in core markets across the globe. Our position as the most recognizable denim brand in the world is a powerful competitive advantage and a key indicator that our brand is stronger than ever. We continue to invest in the brand through global marketing initiatives and impactful activation, ensuring the Levi's brand remains at the center of culture. This quarter, we launched the third chapter of our REIIMAGINE campaign with Beyoncé, featuring a recreation of yet another classic marketing spot from our rich archive. We brought this partnership to fans globally through a limited edition product drop. And through our unique House of Strauss network, who worked directly with her team to create custom one-of-a-kind looks for her Cowboy Carter tour. Being front and center in music culture remains key to our marketing strategy. From the start of the music festival season, we've shown up in a major way from dressing Shaboozey at Stagecoach to hosting an incredible roster of influencers at Coachella. More recently, we were a leading sponsor for Primavera Sound in Barcelona, one of Europe's biggest festivals. With three Levi's dedicated stages, we outfitted influential pop icon Troye Sivan and offered an exclusive product collection. And to further drive brand heat, we continue to lean into the power of collaborations this quarter. After teasing at Paris Fashion Week last summer, we launched an Elevated collection with fashion house, Sacai, which sold at a premium price point and performed exceptionally well. Turning to product. Our evolution into a denim lifestyle brand is gaining momentum. We continue to lead the industry and deliver the best fit, fabric, and innovation, striking the right balance between our authentic denim roots while infusing newness into the assortment. We're staying true to our denim heritage as we build out a compelling head-to-toe lifestyle assortment, and our amplified focus on women's and denim lifestyle is delivering outsized growth. We remain the unequivocal global leader in jeans. We are driving the trends today while setting the trends for tomorrow. Our Levi's bottoms business was up 8%, driven by double-digit growth in women's, and men's was up mid-single digits. While traditional fits like slim and straight styles remain a closet staple, loose and baggy styles continue to gain popularity for both women and men. Ahead of the summer, we saw this trend accelerate in our short offering, which grew double digits in both men's and women's. With the '90s and Y2K fashion in full swing, longer and looser style shorts are in high demand. We're confident we have the right newness and innovation, like the Baggy Dad Jort, in place to deliver for our fans and drive this trend. Earlier this year and ahead of the warmer months, we introduced an expanded line of lightweight looks, including our Linen Plus Denim collection to appeal to our fans' interest in lighter, softer, and more comfortable styles. We've infused these new fabric innovations across our assortment from dresses, rompers, jeans, and truckers to sweaters, wovens, and polos. We've seen strong success across both men and women, and we'll continue to fuel this trend throughout the year as more consumers look for lighter weight offerings year-round. Another notable style trend gaining momentum is what we're calling 'quiet western', an evolution of the full Western theme we saw take off last year but with a more subtle twist. With our robust denim lifestyle offering, we're seeing consumers find that perfect pairing more and more often. Women are pairing a classic blue cut or flared jean with our simple essential rib tank or one of our textured knits inspired from our heritage. And men are wearing a classic Western shirt with a Khaki XX Chino. 'Quiet western' is perfect for the Levi's denim lifestyle aesthetic and a natural place for us to lead. Last year, we reset our tops business, and that work is truly taking hold and propelling our evolution into denim lifestyle. This included bringing in new talent, new vendors, and new capabilities, including a new tops agility function on a shorter go-to-market cycle, which enables a more responsive and on-trend assortment in tops and graphic tees focused on our DTC channels. Energized by this new capability, along with an elevated assortment overall, our tops business grew 16% this quarter with acceleration across genders and channels. Looking ahead, we have everything in place to continue the momentum we've experienced this year, a fresh lineup of product innovation, unique and exclusive product collaborations, and globally relevant partnerships. We have a number of great marketing activities planned for H2, including continuing to fuel our women's business with the launch of an additional chapter of REIIMAGINE, and the introduction of a new campaign focused on underscoring our relevancy and authenticity with men. And you can expect to see the Levi's brand come to life with more exciting and innovative collaborations like our highly anticipated Levi's and NIKE collaboration, which just dropped. For products, we're bringing even more fit and fabric innovation to excite our fans in the second half of the year. We're expanding our diversified fit portfolio to drive the loose and baggy trend while also introducing freshness in skinny and straight silhouettes. As the quiet Western aesthetic takes hold, we're leaning into bootcut and Western inspired fits to fuel this evolving style. And for our iconic 501, we're launching a breakthrough performance fabric with thermo-regulating technology, bringing year-round comfort denim to a closet staple. Now shifting to our strategy to be DTC-first. Our global direct-to-consumer performance this quarter was up 10% with another quarter of very solid positive comps. Our strong performance came from increased store traffic, better conversion rates, and higher AURs, leading to growth both in stores and online across all geographic segments. As we have shared over the past several quarters, we have been focused not only on driving DTC growth but doing it in a healthy and profitable way, and those efforts are paying off as DTC margins continue to improve meaningfully. We continue to enhance our front-of-house consumer experience and back-of-house efficiency, and we are driving full price sales as consumers gravitate to our new assortment. Our work is not yet done, and we see opportunity for continued margin expansion in this channel. We also continue to expand our global store network, opening 16 net new doors this quarter. Store opening highlights include mainline locations in Nagoya, Japan, Seoul, Korea, and in the U.S. in New Jersey. These stores have been designed and built to better reflect our enhanced denim lifestyle offer. We drove another quarter of double-digit e-commerce growth, up 13% in Q2, with both traffic and AURs increasing as our efforts to elevate and improve the consumer experience on levi.com are gaining traction. Our loyalty program is another key connection point to our consumers, enabling us to engage more deliberately with our fans. We're increasingly using data and analytics to personalize loyalty member product offerings and experiences. And we're seeing members purchase more frequently and transact at a higher AUR than the balance of our consumer base. With close to 40 million members worldwide, this quarter, we expanded the program across several countries in Europe. And later this month, we're launching enhanced features for loyalty members in the U.S. Now turning to our third strategy, powering the portfolio. Our international business grew 10% in Q2, led by 15% growth in Europe. Last month, I had the opportunity to visit several of our key cities across Europe, including Paris, Barcelona, and Milan, some of the most fashion-forward cities in the world. I was blown away by how strong and relevant the Levi's brand is in the marketplace, both in stores and with consumers, especially young shoppers. Our team has been hard at work elevating how and where the brand shows up. And I'm constantly impressed by their commitment and dedication, which is another key driver in Europe's overall performance. We spent time with some of our key franchise partners who share our confidence with our growth prospects and are investing more behind our brands. We also met with key wholesale partners like Zalando and Galeries Lafayette, who are leaning into our broadened assortment and lifestyle, particularly with women. And even though Europe is our second largest geographic segment, we still see a significant growth opportunity ahead. Beyond Yoga was up 12% in Q2, DTC was up 31%, and we're encouraged by the very strong comp performance we are seeing in our stores. In June, we opened our first Beyond Yoga location on the East Coast in Greenwich, Connecticut, which showcases our new elevated format and design concepts and features our most comprehensive assortment spanning women, maternity, and men. Our largest Beyond Yoga door to date, this store is already delivering nicely relative to our expectations. And we're on track to open six more doors this year, bringing our total store count to 14. Turning briefly to Dockers. In May, we announced a definitive agreement to sell the brand to Authentic Brands Group. Dockers has been a leader in the global khaki category, and we're confident that Authentic is well positioned to guide the brand's next chapter. I want to take a moment to recognize and thank the Dockers team for their unwavering commitment, creativity, and many contributions to LS&Co. over the past several decades. Their work built an enduring brand with a loyal following, and we're proud of all they've accomplished. In addition, I want to express my deep appreciation to the cross-functional teams across LS&Co. who are working tirelessly on this transaction. In closing, this was another strong quarter across the board, clear evidence that our strategic agenda is gaining traction. We're entering the second half of 2025 from a position of strength with the right initiatives in place to sustain our momentum. Levi's is a brand with 172 years of rich heritage and has remained a global icon. As we look ahead, Levi's has an even bolder future with a bigger legacy, and quarter by quarter, we're building it. And with that, I will turn it over to Harmit to provide a financial overview of the quarter and our expectations for the year.

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

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

Thank you for your question, Matt. We are excited to share that this quarter marks our third consecutive quarter of high single-digit growth, with an increase of 9%. With this confidence, we've raised our full year guidance. We are experiencing broad growth across the board, including direct-to-consumer, wholesale, international, and our U.S. domestic segments, covering both women's and men's products, as well as tops and bottoms. We're witnessing success in new product lines and rising average unit retail prices. Our key strategy is becoming a DTC-first company while still supporting our wholesale business, which has also seen growth. We are transforming our company to be a top-tier retailer, evolving from a denim-focused business to a comprehensive lifestyle brand. Our team is effectively executing this vision, and our products are resonating well in the market. The pipeline has never been stronger, showcasing new and fresh designs, including well-received fits like loose and baggy, as well as popular fabrics such as our linen denim. Shorts have performed exceptionally well in this warm summer season. Our women's segment, which we are particularly focused on due to its potential for growth, is also seeing double-digit increases. The strength of our brand has never been greater, fueled by a solid heritage that we work hard to maintain daily. We are strategically present in consumer spaces, including social media and cultural events, gaining recognition through partnerships, such as our recent collaboration with NIKE, which generated significant interest. As we look ahead into June, we see ongoing positive trends that align with our core business strategy, and we expect this momentum to continue. Finally, we are proud to maintain our top market share position globally as well as our number one rank in the U.S. for both men's and women's products. Harmit, I’ll turn it over to you.

Regarding gross margins, I want to emphasize that we are creating a stronger, more focused, and higher-performing company characterized by accelerated growth, increasing margins, and outstanding returns on invested capital. In response to your question about gross margins, we are achieving record levels each quarter and are set to reach another record by the end of this year. As you are aware, 2023 was approximately 57%. The key drivers behind this include a structural shift towards higher direct-to-consumer sales, increased women's apparel, and stronger international performance, all contributing to higher gross margins. This consistent trend has been a focus for us over the past couple of years, and we've seen results from it. Additionally, narrowing our focus by exiting certain lines has also made an impact. As part of our transformation, we are closely examining productivity in our assortments, eliminating lower-performing SKUs, and tightening our go-to-market calendar. These efforts will lead to higher costs of goods sold in the long run. Our product pipeline is resonating well, enabling us to drive full-price sales while reducing promotions. We are mindful of some challenges like tariffs and foreign exchange, but we have measures in place to manage those. Overall, we feel positive about the situation. If you're wondering whether we've reached the peak of our gross margins, I can assure you that we still have room for improvement.

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

Laurent, to address your question from a few weeks ago, we achieved 13 consecutive quarters of same-store sales, so that's settled. Regarding your inquiry about wholesale, we are being cautious and thoughtful in our strategy. We believe that as our wholesale customers respond positively to the pre-book and demand signals, this channel will continue to expand. It's crucial to approach this carefully since it isn't a channel we solely control, but we anticipate it will remain stable or show growth over time. Wholesale is a significant part of our business, and we partner with excellent retailers. In the wholesale segment, we are seeing growth from online sales and our premium customers, while department stores in the U.S. represent a smaller portion of our business, and we are actively working with them to foster growth.

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

I can keep my remarks brief, Dana. As we mentioned, the brand has never been stronger, and this is driven by relevant products. It's exciting to see our vision of a complete denim lifestyle come to life, and consumers are responding positively. We are investing in the brand and aiming to be at the center of culture. The partnerships and collaborations we're forming are very encouraging. For instance, we've had a successful launch with the elevated designer Sacai from Japan. Today, we are releasing new products with NIKE. Beyoncé has been a fantastic ambassador for our brand, and we've also seen Shaboozey wearing our products at festivals. Looking ahead, we still have more from Beyoncé to come, and we are preparing for a compelling campaign targeted at men this fall. As we approach the fall and holiday seasons, I believe we are well positioned to keep the brand exceptionally strong.

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

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

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

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

Yes, I'm pleased you brought this up. The direct-to-consumer segment has experienced significant growth, with double-digit increases and 13 consecutive quarters of same-store sales. DTC is now contributing over 50% to our total mix and is no longer a burden on EBIT margins; in fact, it has improved considerably. Year-to-date, we're seeing a 400 basis point increase from last year, which also ended at around 400 basis points, likely now in the high teens. There's been a noticeable gap between wholesale and DTC that has shifted from the low teens a couple of years ago. What’s driving this change? Primarily, revenue per square foot. The increase in comparable sales is a key factor, as higher revenue per square foot significantly impacts DTC EBIT margins. We're actively measuring this and exploring ways to enhance it. The introduction of new product offers is contributing positively, and the increase in women's products on the sales floor is also a factor. Additionally, we're examining cost management strategies, including new build costs and labor management, which are beneficial. These elements are key drivers of our progress. I believe we're just at the beginning of this journey, and as we transition to a DTC-first approach, it will play a crucial role. Another point that sometimes goes unnoticed is that our e-commerce business is now profitable. Previously, it had hindered growth, but we're currently experiencing growth in the mid-teens, which is impactful. As we enhance our distribution network to support an omnichannel approach, it should further assist by enabling us to leverage fixed costs with variable costs.

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

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

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

Yes. Regarding your initial question about top line growth, we are aiming for mid-single-digit growth, which is a key focus for Michelle, myself, and the executive team to achieve that $10 billion target over time. In terms of SG&A, we have managed to leverage SG&A year-to-date on a full-year basis since we consider organic revenue as a good benchmark. Our perspective is that SG&A at 50% does facilitate leverage. Our spending is primarily concentrated in areas that enhance our DTC focus. I mentioned the remap of distribution expenses, which is currently in progress, and I want to acknowledge our distribution teams who are working closely with our commercial teams to meet the demand during this transition. Additionally, we are planning to open a net of 50 to 60 stores, with 20% to 30% of that being operated by us, as we reclaim a few markets. We are also focused on an ERP upgrade. Overall, we believe that SG&A will begin to leverage, especially as we reach mid-single-digit growth. Our perspective is that the increase in gross profit dollars will more than compensate for the SG&A increase, which we are observing in flow-through and EBIT margin.

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

We don't provide details about our performance by channel or geography. Our loyal consumers drive increased frequency and are fully engaging with our denim lifestyle offerings, which represents a significant opportunity for us. Given our brand's size, we often joke that we should ideally have around 100 million loyal fans, whereas we started from virtually zero just after COVID. That's the perspective we have in mind.

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

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

To your question on wholesale, I think we'd say largely inventories are in good shape across the channel. And I think your question on how are they responding to our lifestyle assortment, I think it's been very positive. I mean, certainly, some customers are further ahead than others. But if you take, say, Europe, we have more premium offers even in wholesale, and that business is doing really well with partners like Galeries Lafayette, with Zalando, who are leaning into lifestyle and to women's, in particular, but we're also seeing that take hold here in the U.S. And so I think as we sit here and even though a big part of our growth is going to be DTC, it is why we increased our guidance even for this year to flat to slightly positive for wholesale, but it will continue to be an important channel. It reaches millions of consumers, and we're excited and our customers are excited about all the newness we're bringing to them.

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

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

Yeah, and then I can take that one. Harmit, you're spot on with Asia. Asia, we're long on. It's a business that we feel we are underpenetrated. There are markets like India and a couple of other markets, Japan, for example, that are growing very nicely. China is a small piece of our business. It's about 2%. We think '25 is a year where we reset China, and our teams are on the ground right now thinking through that. We'll probably get back to growth sometime in '26. But over the year, we think Asia grows in the mid-single digits, and EBIT margin expands. And then, Michelle, you can carry on. Thank you. As we look at the overall business, we still believe strongly in the Levi's brand and our ability to resonate with consumers around the world. The ongoing transformation into a more consumer-centric and DTC-focused business is fueling our growth and enhancing our market share. We're excited about the opportunities that lie ahead, and as we look forward, we're confident that we can leverage our strategic initiatives to continue this momentum. Thank you for your time today.

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