Conference Transcript - LEVI 2026-03-11

Jay Sole, Analyst — UBS

Great. Well, welcome, everyone. Good afternoon. I'm Jay Sol, UBS's retailing department stores and specialty soft lines analyst. And welcome. I'm sure you've been welcomed already. I'll just welcome you again to the UBS 2026 Global Consumer Retail Conference. We are honored to have Levi's here with us today. Representing the company is Harmeet Singh, Chief Financial and Growth Officer. Also, Ida Orfin is here. She's Vice President of Investor Relations. And I think Harmeet and I are just going to have a little conversation, and we'll have have a lot of questions to get to, so we'll just get started. I guess the first one is, you know, we're going to talk about two different ways. First, you have two different hats. You have your chief growth officer hat, but also your chief financial officer hat. And I think that the first thing I want to talk about is just, you know, in your role as growth officer, what do you expect will be the most important drivers of momentum as you look ahead into 2020?

Harmeet Singh, CFO

Sure. Well, good afternoon, everybody. Thanks for, you know, joining a yin-yang session, but let me just start because, you know, we're in the process of closing quarter one, so, you know, we're in a bit of a quiet period right now, so my remarks are not going to talk about updating trends or, you know, guidance, et cetera. I'll reflect what we really talked about when we reported earnings a couple of months ago and the guidance for the year. To your question, yeah, you know, one weighs two hats, and I hope that's the trend for CFOs going forward, you know, because I think CFOs should embrace growth, and a lot of CFOs do. But just a bit of history. We had a great 25. You know, we've guided a strong 26. If you go back the last few years, our strategies of being brand-led, DDC-first, and powering the portfolios clearly working. And just a bit of stat, you know, growth has accelerated. We closed last year at 7%. Organic growth the year before was four. The year before that, it was flat. We've clearly grown market share. I'm happy to talk about it. And positioning ourselves solidly at the single-digit growth company. The second is, while we're growing the top line, we're also accelerating the operating margin. Operating margins, 23 over 9, 24 a little over 10, and 25 a little over 11, and we're guiding 26 as closer to 12. So as you think about this pivot from a company that had its foundation in denim to a company that has its future in denim lifestyle, We have been able to expand our addressable market, which I can talk about. You know, addressable market in the past was probably the denim category, $100 billion. Addressable market going forward is 15 times that, and I'm happy to share that in a minute. But more importantly, our future is about taking the $6 billion company, making it 10, and taking a company that generates operating margins of, I think, 26, we're saying, the high 11, close to 12, and getting to 15%. We have building blocks that clearly articulate this. Your question about what drives growth and the growth officer's role, I think a couple of things. We spent the last two years really narrowing the focus, you know, exited Denison, disclosed the deal on Dockers, exited a slow footwear business. So really focused on, okay, here's how we grow Levi's. And, you know, we're accelerating growth in Bionia. Really two pieces. The other thing is a lot of companies have different ways to grow. 25 is the best example of what I call the power of the end, which is we grew every facet of the business. We grew DDC, we grew wholesale. sale. We grew U.S., we grew international. We grew men's, we grew women's. We grew bottoms, we grew tops. And what I really like to see is growth not only coming from higher AURs, but also coming from selling more units, because that's the way you get market share, and that's what also really happened. And so, you know, I was just at the leadership, you know, we bring our top 250 leaders together once every couple of years, and I really talked about the power of the end, which means that you've got to grow both sides of the business because the result is really magical. We're able to grow our TAM, which I can talk to you in a minute. One-third of our 7% growth last year was driven by expanded TAM. Happy to get into. So that's the second piece of it. So first, narrowing the focus, really focused on a higher addressable market. and, you know, growing every facet of the business. And if you do this, you know, the 5% mid-single-digit growth is here to stay for a long, long time. So that's really, you know, taking a hard look at, you know, where the growth comes from and ensuring you can drive growth. But doing it, you know, with a financial lens, which is it has to be profitable. It just can't be growth for the sake of growth. That's why the areas that we are growing faster, whether it's women's, whether it's direct-to-consumer, whether it is international, are all accretive to gross margin, and that's important. And as we make this pivot to a DDC-first company, I think DDC, we closed last year at 50%. You know, we are aspiring for the DDC business to get to closer to 55, 60. Obviously, DDC EBIT margins are lower than wholesale EBIT margins, but we have been successful in growing DDC EBIT margins. Last year, we were up 300 basis points, and so making sure we narrow the gap really drives the operating power leverage. That's really what we're focusing on.

Jay Sole, Analyst — UBS

So I definitely want to circle back to margins at some point, but I want to just make sure we pick up this thread of the total dressable market and how it's increasing as you pivot more into lifestyle. I think you mentioned a third of the growth last year came from, you know, TAM expansion. I guess, how much larger is the opportunity longer term? And maybe if you can also touch on the launch of BlueTab, you know, your high-end denim collection, how is that doing and what's the opportunity there?

Harmeet Singh, CFO

Sure. So I'm wearing the BlueTab denim's bottom and the BlueTab blazer. You got cool shoes that match with it, too. And the collaboration with A. Jordan, which we, you know, launched as we, you know, launched the Super Bowl ad. But basically, the denim category is about $100 billion. It's growing, you know, around a mid-single-digit range. Ten percent of the denim category is what we call premium denim, what we are internally calling affordable luxury. We've not played in it, you know. And so about a year ago, we launched the Blue Tabs. Prior to this, it was largely a made-in-Japan product sold in Asia, largely men's bottom. Blue Tab is now taking the – is inspired by Japanese denim, selvedge denim, but it's more. It's more a head-to-toe look, both for him and her, and it's growing very nicely. Last year, we tested it in a few doors. This year, we are scaling the test, and we really scale the business to 27. That's how we're thinking. But it's a big piece of the denim category that we don't plan. So that's one, you know, I would say, organic expansion of TAM. The other thing that we are doing is, you know, most of you are dressing a lot more casually as you go to work, but you're not dressing in jeans every day. So we're really making this pivot, especially after the exit of Dockers, to drive more non-denim men's bottoms. We introduced performance tech. We're doing our chinos business. In the U.S., Levi already sells more chinos and performance tech than Docker's ever did, as an example. We're just getting started. So that's one area. The second is we've introduced denim skirts and dresses for her, which we never had. Again, denim aesthetic is something that we never played in. I talked about the blue tab. The other piece is, if you think of waist up, you know, we've really focused on growing our Toffs business. Our Toffs business in quarter four was about half our growth, grew about 7% a year ago. It's still only 20% of our business. And we make this pivot to denim lifestyle.

Jay Sole, Analyst — UBS

There's clearly an opportunity.

Harmeet Singh, CFO

So we leaned in on sweaters, sold out. We leaned in. I mean, we didn't have quarter zip, and a lot of, you know, men here, we love quarter zip. I love my quarter zip. We don't have it. We didn't have it. We will probably have it at some stage soon. You know, as you think about shirts, you think about polos, you think about, you know, woven shirts for her, et cetera, and those are the areas we're looking for. I made a big play on our way in quarter four. Did really well. I guess the only thing I would say is, you know, this new TAM, which is probably a trillion and a half, doesn't mean we're going to just do apparel for the sake of apparel. It has to be driven by a denim aesthetic. We're not going to be fashion forward. We're still going to be slow fashion because, you know, managing inventory and all that is a foreign piece of the pie. So that's how we're thinking about the market. And that apparel segment is growing also sometimes a little higher. The performance is for a piece. So I think we've got, you know, growth and a sustainable level of growth. Especially as you make this pivot to a denim lifestyle and driven business. Now, what happens is, you know, we're not taking our eye off the wall on wholesale. Wholesale has to grow. But when wholesale customers see what's happening in our direct consumer business, they start leaning in. Macy's, for example, in Harrell Square leaned in, and they're giving us a larger footprint for men, a larger footprint for women, more denim lifestyle. We had a few of our key customers come during Super Bowl. That's all we talked about is how do they lean in more in women's. Women's is leading the denim category growth in the U.S. How can they lean into that? How can they lean into that? So there's a lot more opportunity.

Jay Sole, Analyst — UBS

That makes sense. And I guess I want to follow up on that, ask you a question. I don't think I've actually asked you this before, but what strikes me when I walk into the store is that, and you just mentioned it, it's denim-led. If you're going to do denim shirts and things that you haven't done before, it'll be denim. There are a lot of denim tops in the store. I think that the part that I haven't asked you is that it feels like a very patient way to grow a brand and gain credibility in other categories, which has to ultimately drive an even bigger lifestyle assortment, which can capture an even bigger part of the TAM. Because I think as investors, we don't want to see companies rush into other categories where maybe the consumer hasn't quite given you permission to play, because that can feel inauthentic and that can turn the consumer off. But the question is, how intentional has that been? How intentional has it been to say, all right, we know we can be a lifestyle brand. We know we can be more than a U.S. wholesale men's blue jeans business. We know we can be a global omni-channel men's and women's lifestyle brand across many categories, but, you know, it takes time to get there and to bring the consumer along with you. Authentic and exciting. So just tell us about how you companies manage the brand from a standpoint.

Harmeet Singh, CFO

So 10 years from now when you walk into the store and you're seeing a whole lot of different options from Levi's, the consumer says, of course, that makes total sense versus just kind of rushing into stuff, Yeah, and I think that discipline, you know, when Michelle came on board a couple of years ago and Chip was still around, you know, he said, Michelle, and Harmeet, because I was looking at the corporate strategy, why don't you guys get together and let's see how we refine the strategy. We sat as a group, got the executive team, and that was really a big aha was, okay, we had a bar denim. We were moving into lifestyle, you know, but it was not about denim lifestyle. We were doing lifestyle for the sake of lifestyle. And we said, okay, no, it has to be our denim lifestyle. And if that's the case, what's the role of footwear? You know, probably not. We're not great at footwear. We've got other footwear brands. We can collaborate with brands like New Balance and Nike, but that's not what we want to wake up every morning. Dockers was a piece of that and said, okay, maybe not. You know, and so it was a more disciplined approach. And the idea really was whatever we do, we want to be great at. because Levi's is known for quality. It's okay to be slow, but it's great to have a strategy going forward. So when I talked about BlueTap, we just didn't get there and say, okay, we're going to own this and take it from whatever it is to a $100 million business. We are going to step our way into it because what is also more important is we've got to convert our associates who are used to selling denim bottoms, they've got to come along in this journey. I have a big... When I talk about commitment, I talk about three levels of commitment. The first is a political commitment. When a leader says we have got to do this, people normally nod their heads. Very little actually happens, right? The second is the intellectual commitment where you engage people's minds. A little more happens. But what really makes a difference is when you engage their head and mind and explain what is in it for them. And that's why, you know, when we called our 250 leaders together a couple of weeks in San Francisco, and I was on stage and Michelle was on stage and our product person was on stage, we were talking about this journey into learning lifestyle. Why is it important? How do you engage people? How do you grow market share? We talked about the new TAM, the 1.3. That's $1 trillion. dollars one of the things that revealed in in there because we want people to feel that we can be a bigger business and we can do it the right way while protecting the DNA of be wise you guys draw so that's why it takes a little time you know and we got a large wholesale business they've got a bunch of other brands if they have to start giving us more flow space going to come from some somewhere and so that takes a little time Makes sense.

Jay Sole, Analyst — UBS

Well, let me follow up with one other of that, too, because you mentioned BlueTab a couple times. You know, getting into BlueTab, which is a way to, you know, get into that aspirational luxury, I think, as you called it, and it elevates the brand, you know, to be able to sell things at a higher price point. But at the same time, you talked about Denizen, talked about some of the businesses that you've exercised. And, you know, we know there's been changes in the distribution, maybe getting away from some of the promotions and discounts and maybe channels where you don't feel like the future is as bright as other channels. Because, you know, the company doesn't use the term quality of sale very much, and it doesn't really talk about brand elevation necessarily, because other companies will use that term. But to me, clearly, Levi's has been on that journey to say, hey, we are the best brand in the world when it comes to it. We want to represent that when we go to different channels and different places. We'll talk about how much work is done, because it feels like a lot of work has happened over the last five years, and even now getting to the point where you can do premium denim because a lot of the work that, you know, you set yourself up to get to this point, So you cut off sort of the bottom end of the distribution where maybe it was holding the brand down. You talk about all the work that's gone into that, and is there still more work to do to be that, to be what Levi's, the best version of Levi's that it's been.

Harmeet Singh, CFO

You know, when we guided this year, we talked about pruning some club business, talked about pruning some grocery outlet business. When the brand didn't have its moment, was not as strong, we were into, you know, we were selling through retailers that we feel. We probably should not. And so we are trying to elevate the brand. You take Target as an example. Target was selling Denison. That was all. They were selling, $30. Then we partnered with them and said, let's introduce RedTab. We tested it. We tested it with 70 stores for men, 20 stores for women. Then we expanded it, 200 stores. We went to 700 stores. When we touched 700, we had a discussion and said, maybe we don't need Denison. It's $150 million business. We took a year and a half and exited that. Now, as you know, a week or two ago, we've decided to expand that to 1,000 stores because it's really elevating the Levi's brand in Target. And so it's just a bit of a journey as an example. So to your point about pruning businesses, I think we have a large off-price business. We don't make for our price. We've never done that. It's largely flush. And as the inventories are healthier, as a consumer is in a good spot, our products are working. We're, you know, slowly pruning that business off also because it really allows us to elevate the brand. Soon after COVID, we probably prune, I think, two and a half, 3,000 different doors in Europe, smaller doors, not, you know, as quality conscious. We like it, et cetera. So where we can, we did a little bit in India, I think, last year. So I think it's a constant evolution, and it takes a period of time. We're not going to yank ourselves out of large customers. That's not – some brands have done it. That's not who we are because we want to drive market share. And we have some real loyal consumers who love us, and so it just takes a little bit of time.

Jay Sole, Analyst — UBS

Maybe, you know, you mentioned on your last earnings call, I think 40, excuse me, 50 to 60 net new store openings this year. As you expand stores globally, which markets and countries are you targeting? And maybe if you can talk about the improvement in profitability, which you mentioned before in the DTC channel, what's been driving that, that would be the next couple of questions.

Harmeet Singh, CFO

So our model is about 50 to 60 net new system does every year. As part of my growth officer role, I also look after all real estate, real estate expansion, franchise expansion, et cetera. And having spent my formative years in a franchise business, ensuring that the franchises are able to grow is really near and dear to me. because if you take out 3,300 doors that have a Levi's logo in front of them, about 2,000, 1,500 to 2,000 franchises, the rest we operate. And so it's important to get the entire system to grow. The 50 to 60 doors on a net basis, I would say 10 to 12 in the U.S. In the U.S., the business was largely an outlet business 10 years ago. Now we have about 80 full-price doors. So, you know, in New York you have, you know, beside our Times Square door, you have a door in Soho Street, Hudson Yards, 34th Street, et cetera. We opened about four last year. We scaled up, you know, about eight, ten every year. But then we took a bit of a pause because we wanted the stores to be really profitable. We wanted, and the other thing we did was we took our doors and said, if you really want to accelerate the women's business, we should lead with women. So when you walk into a door, the women's assortment is right there. 70% of our doors in the U.S. now lead with women. And women is 50% of the DTC business in the U.S. And we're just getting started around the world, as an example. Because these stores are now very profitable, we are scaling it up to 10, 12 a year. I think we can double that. And what it does is it changes the business in the U.S. from primarily a wholesale business to a business that has DDC and wholesale at an equal fitting. I think we ended last year with, in the U.S., DDC was about 45% of the business. So I think that's the transformation. Outside the U.S. are the other doors, largely in Asia. Europe is about 5-10 doors a year. The rest are largely Asia. So that's, and I personally believe we can be opening 50, 60 for the next, you know, four or five, six years.

Jay Sole, Analyst — UBS

So, you know, really growing the system.

Harmeet Singh, CFO

The reason, the way I think, you know, when I call, look at the DTC business, I call it a bit of a trifecta. You grow same-store sales. We've had 15 consecutive quarters of growth on that. You open new doors, 50, 60 a year, and you grow e-commerce in the mid-teens. So that's a good trifecta, and we've been doing that successfully. Your point about DTTC profitability, I think we ended last year in the high teens, and this is fully loaded. We're loading the cost of running stores, including above the store, and e-commerce, fully loaded technology for e-commerce and advertising. Wholesale margins are probably in the low 30s. And so, and last year, DTC margins were up by 300 basis points, largely driven by three factors. One is higher revenue per square foot. As we, you know, I talked about the women's business, for example, really driving and accelerating. You know, we're really focused on converting more. Traffic is probably flat-ish kind of thing, but we're growing only because we're converting more. This year we're making a big pivot on driving more units per transaction. If it's all about lifestyle, you walk into the store, you may walk in for a denim bottom, but you walk out with a denim-inspired top and a bottom. So we're really making this pivot to drive more UPT. So that's one piece of it. The second is gross margins and direct-to-consumer business are pretty good. We're also narrowing promotions. I mean, one of the things we realize is if our products are resonating, there's no reason we shouldn't be selling more at full price. So we're taking a hard look at our promotions. We're reducing the cadence. We're reducing the window of promotions.

Jay Sole, Analyst — UBS

And we're driving more full price selling.

Harmeet Singh, CFO

I think that's an opportunity that will be here for a while. And the third is just getting better at managing costs, labor productivity, tools, et cetera. You know, we didn't grow up as retailers, DDC retailers. We grew up as wholesalers. So we've got talent. A commercial officer has spent 30 years in retail. He joined about two years ago. He's part of a few people who have done this for a long, long time. And so we're really investing in tools that make this and improve the margins and productivity over time.

Jay Sole, Analyst — UBS

Makes sense. You know, I think just from my perspective, talking to a lot of investors, you know, a few years ago, the question was, will the next, you know, we talk about the next-gen stores and rolling them out, and it's a new format, it's going to work. I mean, that was something that was an open question, you know, how successful can Levi's really be with their own store format? And that's, I mean, just the way, you know, talking about the margins and success and all the productivity that you've had, I mean, I think that people have sort of not really realized that Levi's has unlocked this opportunity. And to your point, you can see 50 to 60 doors per year for quite a few years going forward. I don't know if that unlock is truly appreciated because now you're just like, okay, hey, we figured this out. We know how to do this, and we're doing it. It's been very successful, and now we're rolling it out. It's a much different story than a couple years ago when, you know, people were like, oh, is this really going to work? Lisa, it's kind of a whole company, and now you're here. So to me, and from what I've understood is that, you know, before when you have, you know, in your mind you always assess a probability of how successful something is going to be based on the evidence that you have. I mean, the probability of this DTC operation being way bigger and taking advantage of this huge TAM that you're talking about is so much higher. Just given what you've proven over the last few years, Sometimes I feel like that's lost on people.

Harmeet Singh, CFO

No, I think you're right. I think the couple of myths, you know, if I could bust, I'd like to bust. One is we're more than just wholesale. You know, we have had wholesale now grow for a while, but we're more than just wholesale. And more than just U.S. wholesale. You know, that's one. And second is DTC is here to stay and is successful. You know, so, for example, when we were ramping up new doors, one of the things we did earlier on, and this was in discussion with the board, was two things. One, ROIC became a metric in the long-term compensation of leaders in the company, okay? We had to make people, educate people what ROIC really stood for, but every store has an ROIC. We have a threshold. The other thing, and I learned this during my retail days at YUM, is you have to measure the returns on stores. And so we've got a concept called hit rate, which is, again, something I did at YUM years ago, which is how many stores actually hit the revenue and profit threshold. And we review that with our finance committee of the board every year and with the executive team. And our hit rates have never been better. Okay, I'm not going to get into what it is, but it's pretty damn good. And so it's all about learning. It's a topsy without blame and saying, okay, here are the stores that didn't work. Here's why it didn't work. Let's learn and get on with it. So I think, you know, it's a journey. It takes a little time, but, you know, we're pretty pleased with the progress that's being made. So, you know, over time people will, you know, I think the question we get a lot of time is, give us your same-store sales number, right? Give us your comp sales. We have this debate internally. But we have talked about the fact that it's positive. At some stage, maybe we have the courage to give a number. The thing about a number is once you give a number, then you have to give it every time. But the fact I would say is direct-to-consumer business has been growing high single-digit, low double-digit for years. And it's 50% of the business, and I think it can continue to grow.

Jay Sole, Analyst — UBS

I want to ask a couple things. I know you mentioned you were getting a lot of questions. I know a lot of questions about price increases last year. First, Joe, just remind us what kind of price increases you did take in the U.S. to offset tariffs. And then when do those price increases kick in, and then how much tariff impact is embedded in the guide for the fiscal FY26, the current fiscal year that we're in for the flat gross margin guide.

Harmeet Singh, CFO

So it's, you know, as you know, it's changing on a regular basis. Our guide is zoomed in incremental 20% of tariffs for 26. You know, pre-liberation deal in 25, we were probably paying about 13% tariffs. An incremental 20%, you know, takes it to close to 32, 33%. That's what our guide has assumed. You know, the latest that we are hearing, the 20 is probably closer to 15. We will, when we report earnings in April, we will quantify that. Whether we change guidance for that, I don't know. It depends what happens because, you know, it could change. But we'll quantify the impact of it. The way we handle pricing in the U.S. is we didn't price for, you know, And that's about the increment of 20 percent is about 150 basis points headwind to gross margin. We did guide that gross margins would be flat in 26. So we've got a couple of things that are offsetting it. One is pricing. So we didn't price 100 percent for the tariffs. But a third of the tariffs has been priced largely in the U.S. And that's a combination of pricing on products that, you know, are new and rolling out, which is innovation, as well as the core products. We didn't lead. We were not the leaders in pricing. We were thoughtfully weighted. You know, department stores have taken up pricing on private label. We want to make sure that the difference remains, you know, between our pricing and that. And, you know, we leaned in more to the products that were new. So that was one piece of it. It went into effect largely in quarter one, between January and February. So far, no pushback from the customer in terms of what they're buying for the year. And the consumer generally is resilient. So we're seeing that, you know, as we speak. The other third, we actually tried to offset by product cost negotiation. A large piece of our growth last year was volume. 50% of our growth this year should be volume because we're selling more, we're growing market share. We leveraged the volume with our vendors. We have also eliminated a lot of unproductive SKUs. That has led to improved margins. We also opened the door with a few new vendors that drove a little bit more competition. And cotton as a commodity, you know, was a little lower than a year ago. So a combination of that has led to lower product costs. The other thing about our model, as you grow women's, you grow DDC, you grow international, gross margin probably improves 30 to 40 basis points a year. So you take the combination of these factors as well as higher full-price selling, that's how we were able to offset gross margin. Gross margin is largely flat. Gross margins hit a record last year. We closed, I think, very close to 62%. It was 58%, not very long, right? So it has grown nicely. And given that the brand has momentum, given the brand's so strong, products are resonating, we think accretion of gross margins is here to stay. So that's how we are kind of addressing, you know, the impact of tariffs as the year progresses.

Jay Sole, Analyst — UBS

I want to keep moving. I want to ask you about SG&A. Specifically, I want to ask you about the changes to your distribution centers in the U.S. I guess when do you expect to see the full benefit of your distribution center transformation on SG&A leverage? And what have been the issues you have faced relative to your experience?

Harmeet Singh, CFO

Yeah, so, you know, as we are getting ready to become a $10 billion company from a $6 billion company, the few infrastructure investments we made, one was, you know, like a lot of retailers, we're upgrading our ERP. North America has done, went flawlessly. That was part of my remit as CFO. We've done probably half of Asia, the rest of Asia. We're doing beyond yoga as we speak, and so far it's going really well. We finish Asia sometime in the next 12 months and then do Europe, and so we're largely done. What it really does is it gives us a foundation for real data unlock. We can accelerate e-commerce. We can accelerate our AI initiatives, et cetera, because now you have one common platform. You know, I can sit in my office and I can see how each store in North America or anywhere else is performing on a minute-by-minute basis, how DCs are doing, which I could never do. So the other piece is really our distribution network, which was all built for wholesale, not built for omnichannel. Now, you know, our European network is now built for omnichannel. Take the U.K. D.C. that we operated, that we brought in e-commerce. That was really servicing wholesale and stores until about May of last year. We brought in e-commerce with a third party, and our U.K. business has been on a complete fire. I mean, the retail in Europe is largely flat to down. We are going double-digit because we are servicing faster. So we have one common inventory, and the shipping costs on e-commerce are hard. So that's just an example. We're in the process of doing that with our non-UK business as we speak. That probably gets live by the end of the first half. And our viewpoint results in the second half of last year have been generally good. So I think Europe is generally feeling good about it. In the U.S., we had four DCs that we were operating. Two were, you know, 30 years old, built for wholesale, largely manual. And so we said rather than, you know, remodel these DCs, which means you have to shut it and spend hundreds of millions of dollars, we said let's go with a third party. And so we have signed up with Merch. And Merch is in the process of ramping up. That's gone a little slower than we expected, largely because technology has taken a little longer to stabilize and ramp up. As that was happening, we were seeing demand for our products go through the roof. What I did, because Michelle asked me to look after this for a while last year, is instead of shutting both the DCs that we were going to shut, I kept one open. I shut one because we couldn't service the demand. And that's where we've had some distribution costs that are higher than we expected. But we were able to drive higher volume on it. The thinking is, as we said in our guidance of Q4 earnings, the thinking is that stabilizes by the end of the first half. We can shut the DC that's running parallelly. And then we start bringing e-commerce in. And so I think by the end of the year, we start seeing benefits. I mean, right now our distribution costs are a little over 7%. You know, I think there's at least a point there, maybe more, you know, as we try and leverage demand, make sure there's inventory efficiency, et cetera. The other thing that has happened is we now have a chief supply chain leader who has distribution experience. We have also added a couple of distribution experts. Because what we're realizing is while we manage a hybrid system, Some we operate, some operated by operators like GXO in Europe and MERS. We really need that experience in-house to really work with our third-party providers. And it's a huge unlock. In my view, it's probably unlock for top line as well as bottom line. But that will take time. It happens over time.

Jay Sole, Analyst — UBS

I mean, it sounds really powerful, frankly. I mean, just to be on one global platform is the idea to have the data, and have the visibility that you're talking about in your office to see every store and every DC. You mentioned AI as part of that. Can you just talk about how the company is leveraging AI to drive the business?

Harmeet Singh, CFO

Yeah, I mean, we're leaning in. Michelle's personally taking this as a challenge, which is great. We are a retail apparel player, but we work in San Francisco. The city is completely changing because of the AI. focus so where we're leaning in is on two areas one is how do we drive or engage with our consumers better and that is both online and in the store so we've got use cases where we're saying if you have a chat board that person that helps you shop and drive users shopping experience how does that unlock and improve the shopping experience For our stores, you know, our associates, you know, require help and training on, you know, new stuff. So we're using, you know, something called Stitch that really helps them, you know, become better sales associates. Internally, the thing we've done this year is we've said no more incremental headcount. And we're going to drive more automation using AI. I've established what we call talent hubs, global talent hubs in Bangalore, in Warsaw, and in Mexico, and that's beyond finance and technology. Target is a great example. They have 5,000 people in Bangalore, and it's across all functions. And so the question for us is, how do you drive that across all functions, take some processes, and streamline the processes while automating it? So that's what we are looking at doing.

Jay Sole, Analyst — UBS

And you get great talent.

Harmeet Singh, CFO

I mean, that's why we're calling it Talent Hub. And I said, you know, we can't call it a global capability center. It's actually a Talent Hub. We get talent across both genders. We get talent that really knows how to use AI and other tools. And so that's the other piece that we're doing, you know. Forecasting our revenue for the people here, you know, who are in the finance camp. We've got an algorithm that we've kind of rolled out a couple of years ago. Harvard has written a business case study. It's taught in the second year MBA program. And it's about using that algorithm to really help improve our revenue forecasting. And it probably predicts one or two points better than, you know, my wonderful, you know, sources around the world. It doesn't replace the, you know, human modeling. It just helps improve. For example, every time I have a forecast and I discuss it with a team, I have what the algorithm tells me. When I do earnings, I have what the algorithm tells me. And we use that as a way to kind of decide what we guide, et cetera. The board is very, you know, sees it on a regular basis. Now we're expanding the algorithm to help forecast profit and cost because that's the next journey, you know. But we've got a lot of great growth. I really want to improve the flow through and the operating margins, you know, for the company. and I think things like this will just help us get better.

Jay Sole, Analyst — UBS

All right. Well, I know that flow through and margin expansion is very important to you. So I want to get to this question because I know it's very topical, but can you just talk about your Middle East business? Obviously, you talk about it.

Harmeet Singh, CFO

Yeah, no, it's unfortunate what's going on. But a Middle East business is a small business. It's less than 1% of a total business. The product we get through the Strait of Hormuz is probably just services the Middle East. So it's very, very minor. It's largely a distribution business, so it's in the hands of distributors. And so there's the operating leverage or deleverage when the business is down is not pretty high. And so that's our – and we'll talk more about it when we talk earnings in a couple of weeks. But, you know, the teams are game planning this as we speak. I mean, you know, as you think about the impact of oil in businesses like ours, I mean, we went back, I went back and looked at what happened in 2008, what happened in 2011, what happened with the Russia-Ukraine war. The thing that we saw was sales didn't suffer at all. You know, there was not a dramatic impact. The other piece is what happens to product costs. You know, cotton has remained where it is, you know, probably a little better. So that's, again, and we've locked product costs in for the year. So that's not an impact. And then is the currencies, right? And so far, that's been okay. So as you think about this, depending on how long this goes, we have game planning. Like we had a tariff task force as part of my transformation office. We've got a task force now game planning this as we speak. But if the consumer remains solid, as, you know, no signs yet, I think, you know, it's okay.

Jay Sole, Analyst — UBS

Okay. All right. So maybe in the last two minutes, I want to ask one capital allocation question, and it's how are you thinking incrementally about near-term capital allocation priorities as well as dividends and buybacks? Sure.

Harmeet Singh, CFO

So we spend about 3.5%, 4% of our revenue on CapEx. Two-thirds of that is to grow the companies to think about opening doors, remodeling doors. We probably, between opening and remodeling, we're probably doing a door a day for the year, which is great. We also spend on technology. Think about e-commerce. Think about some of the AI investments. That's about two-thirds, and about a third for infrastructure, which is ERP upgrade, you know, some maintenance work. So that's one piece of it. We're a dividend-paying company. Dividends grow in line with net income. Every year, for the last few years, we've taken up dividends 8%. We normally do that in the second half of the year. And then we buy back stock to offset dilution. If there's more cash with, you know, our balance sheet is so strong There's a lot of cash. We return more back to the shareholders. So, you know, we exited Dockers, probably generated a couple of hundred million in cash. That's all been returned back in the form of an ASR program in Q4 and an ASR program in Q1. And so that's the way we think about it. If there's more cash, have a discussion with the board and, you know, there's nothing to do because we are now focused on two narrow businesses of Levi's and Beyond Yoga. that's something that we can always explore it.

Jay Sole, Analyst — UBS

I think that's a great place to stop, Harmeet. Thank you so much. I always enjoy speaking with you, and congratulations on the success.

Harmeet Singh, CFO

Thank you, Jay. I appreciate everybody taking the time. Thank you a lot.

Jay Sole, Analyst — UBS

Thank you, everyone.