Earnings Call: Q3 2019

Oct 8, 2019

Good day, ladies and gentlemen, and welcome to Levi Strauss and Company Third Quarter Earnings Conference Call for the period ending August 25, 2019. All parties will be in a listen only mode until the question and answer session, at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available 2 hours after the completion of this call through October 14, 2019. Please use conference ID 6,988, 596. This conference call also 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, Senior Director, Investor Relations and Risk Management at Levi Strauss and Company. Good afternoon, and welcome to our quarterly conference call. I'm pleased to introduce members of the Levi Strauss and Company management team: Chip Burge, President and CEO and Harmit Singh, Executive Vice President and CFO. Before we begin, let me briefly remind you of a few items. Our discussion today may include forward looking statements, including statements regarding our strategies and expected financial and operating performance. Although these statements reflect the best judgments of our senior management, they involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the statements as more fully described in our annual report on Form 10 ks, our registration statements, today's earnings press release and our other filings with the SEC, all of which are available on our website at levijos.com. We disclaim any responsibility to update our forward looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We provide information on our website about how we compile various measures used to describe our business performance. Participants on today's call may discuss non GAAP financial measures. Reconciliations and descriptions of our non GAAP financial measures are available in the Investors section of our website as well as in today's earnings press release. Finally, today we filed our quarterly financial report on Form 10 Q with the SEC, which is now available on our website. Now I'll turn over the call to Chip Berg. Thank you, Ida, and good afternoon, and thanks to everyone for joining us here today. We delivered strong Q3 results and remain on track to achieve our full year expectations. Revenues of $1,450,000,000 in the 3rd quarter were up 4% on a reported basis and 5% on a constant currency basis. This brings year to date revenue growth to 8% in constant currency. Our strategies to strengthen the Levi's brand and diversify the business beyond U. S. Wholesale and men's bottoms to faster growing markets and categories have helped us deliver these results and offset the challenging U. S. Wholesale dynamic. Our strategies are working, and we are confident in the future. I'll briefly touch on some key highlights from our Q3, all in constant currency and versus prior year. Our international results were again very strong. Europe grew 18% on top of 17% a year ago, and Asia grew 12% on top of 10% a year ago. Our global direct to consumer business was up 12% and has now grown double digits for 15 consecutive quarters. And within that, our e commerce business grew 21% with increased e commerce traffic in all three regions. Our total women's business grew 12%, which was the 17th consecutive quarter of growth in women's, with each of the last 11 quarters being double digit growth. And our total tots business was up 17%, the 15th consecutive quarter of double digit growth in tots. The Levi's brand continued its momentum, delivering 8% revenue growth in the quarter on top of 12% growth a year ago. Levi's brand strength is driven by our ability to bring the brand to life for our fans through leading product and marketing. With a history of nearly 150 years, the Levi's brand is both iconic and relevant as we continuously reinvent the brand and lead the industry through new fits, innovations and bold marketing. We launched a number of exciting collaborations with iconic partners in the quarter, including Hello Kitty and Stranger Things, which generated billions of impressions for the brand and gave consumers a reason to make repeat visits to our store. We continued our investment in digital innovation by launching Future Finish, an online customization experience on levi.com that leverages our FLX technology, which makes it easy to create a custom pair of Levi's and puts the power of personalization directly into the consumer's hands, and we're premium pricing it. At the end of the quarter, we again collaborated with Nike, showcasing the power of these 2 celebrated brands, this time with a focus on customization. We worked with the Nike by You program to allow consumers to create their own custom Nikes with Levi's fabrics and trims using our FLX technology. And we also partnered with them to design exclusive co branded sneakers available in select Levi's stores, which sold out in 3 days. We have a number of other prominent collaborations in the pipeline for Q4. We just introduced the next iteration of our trucker jacket with Jacquard by Google, which uses advanced technology and patented conductive fibers woven into the fabric of the jacket to seamlessly and wirelessly connect your trucker to your smartphone. This latest version features an ever expanding range of digital technology. And we recently announced a much anticipated collaboration with Disney's Star Wars, which will be available in our stores and online on November 1. These strategic collaborations with other iconic brands underscore the strength and relevance of the Levi's brand with consumers of all ages and backgrounds. Levi's is the number one denim brand in the world by a mile, and we are maintaining our share leadership position by putting the consumer and our values at the center of everything we do. Before I review our strategies, let's talk a moment about the U. S, which I know is on everyone's mind. As a reminder, we manage the U. S. As a marketplace using both channels, direct to consumer and wholesale, to drive our brands. Our success in direct to consumer continues to be the best indicator of the Levi's brand strength in the market. In the U. S, our DTC performance remained very strong, up 7% with e commerce outlets and full price stores all growing. Our DTC strategy in the U. S. Will include testing some smaller footprint stores in great locations around the country in the coming quarters. Growing our U. S. Direct to consumer business allows us to move towards premiumizing the marketplace and remains one of our important strategies to offset headwinds in U. S. Wholesale by continuing to reduce our concentration in that channel. When I joined the company 8 years ago, U. S. Wholesale was almost half of the company's entire global business. Today, it's around 30% of the company's business, and this will continue to trend down as other parts of the business grow at a faster pace. As anticipated, U. S. Wholesale in the Q3 faced a tough comparison to prior year for the reasons we've shared previously. Anniversarying selling associated with the re launch of 1 of Dockers' key product lines in 2018 reducing sales to the off price channel in 2019 due to our healthier inventory and lapping stronger sales in 2018 to a large financial distressed retailer and the overall softness in U. S. Department stores and chains, primarily due to the well publicized traffic trends there. The first three factors, which collectively adversely impacted 3rd quarter U. S. Wholesale comparisons by about 6 points, are not indicative of our underlying performance in the channel. Adjusting for these, U. S. Wholesale declined 4%. We continue to work with our customers, leveraging the brand strength and diversifying categories on the pad to show up much more as a lifestyle brand, including more wins and more tops. We're bringing some of what's working in our DTC business to U. S. Wholesale, including better merchandising, brand environment and service, and we're investing in our on floor presentation at some of the top doors of key accounts to achieve this. By doing so, we're winning in a tough marketplace with sellout trends better than each of the banners themselves. We're also taking a segmented approach to U. S. Wholesale overall to drive the business within the broader channel, deploying various strategies to capture growth, and these strategies are working. Examples include securing incremental distribution, including with premium customers, which is helping to premiumize the marketplace and expand access to our better and best products to U. S. Consumers expanding our pure play digital and wholesale.com business while maintaining brand integrity and healthy margins and growing with our partners in the mass channel, bringing quality products to consumers at great price points. Even with these strategies, comparison to prior year are going to be lumpy on a quarter by quarter basis due to the timing of shipments, door closures, product launches, etcetera. So it's important to evaluate U. S. Wholesale performance over a longer time horizon. For now, we see the Q3 as the toughest comp for the full year. And while we'll have the tail of the Dockers impact and lower off price sales again in Q4, we expect that U. S. Wholesale comparisons to prior year will improve in the Q4. We expect that U. S. Wholesale will remain challenging, but we are strategically evolving our approach to the channel and will exit the year with a structurally stronger wholesale footprint than we entered it. Now turning to our Where to Place strategic choices, which as a reminder, are drive the profitable core, expand for more and become a leading world class omni channel retailer. 1st on the profitable core business, which comprises men's bottoms, our top 10 wholesale customers and our top 5 mature markets. Revenues in each of these three components of the profitable core grew in the 3rd quarter when adjusted for the dockers and off price impacts to U. S. Wholesale that I just discussed. Most importantly, we've grown revenues in each of the three components of the profitable core, low single digits on a mid to date basis without any adjustments. Turning to our second strategy, which is to diversify the business by expanding for more in the top women's underpenetrated markets and with our value brands. 12% growth in our women's business was fueled by the success of our high rise skinny fits and ongoing growth in women's tops. Total tops growth of 17% was balanced across men's and women's, driven by truckers, sweatshirts and tees as we continue to diversify within the category. Graphic tees remain a hot item, up 6% in the quarter after being up more than 40% in the Q3 last year. Each of our emerging markets of India, Russia and Brazil posted another quarter of double digit growth. And in China, net revenues grew 2%. Our company operated doors in China grew mid single digits from positive comp performance and a shift towards more full price stores, and this was on top of double digit growth last year. Franchise performance was mixed as we continue to work to turn around that part of the business. Last week, in collaboration with a franchise partner, we opened a new 7,000 square foot store in Wuhan. This is now our largest store to date in China, allowing us to showcase a broader assortment, including super premium products and early consumer response has been very strong. And on the heels of our recent rollout of Levi's customization services on WeChat, we've joined forces with the hugely popular music and dance game, QQ Dance, to create a 3 d rendered wardrobe for its game characters, so consumers will be able to dress like their game avatars. Check it out on YouTube by searching for Levi's QQ Dance. Not only do partnerships such as these provide consumers with a fun, interactive shopping experience, allowing them to define and design their own pool, but they also pool, but they also support our endeavor to position the Levi's brand at the center of culture. China remains on track to push growth for the full year after being flat last year. We have the right people and strategies in place to accelerate China's growth in 2020. The 3rd way to play strategic choice is to become a leading world class omnichannel retailer. Direct to consumer growth of 12% reflected strength in each of our 3 regions. Global DTC for us includes the brick and mortar stores and e commerce sites that we operate. Revenue growth in our brick and mortar stores was up 10% globally. Performance of existing stores improved both internationally and in the United States in our outlets and full price stores. And we continue to build out our store network, which has grown by 90 stores since last year. In the Q3, we opened the largest Levi's flagship in Asia in Tokyo's Harajuku District, the center of Japanese youth culture and fashion. Global e commerce growth was even stronger, up 21% for the quarter with increased traffic and double digit growth in all three regions. We continue to enhance our omnichannel capabilities. Our rollout of shipping store continues, and we are now also leveraging RFID technology in more than 500 stores across 17 countries and growing. Both of these initiatives allow us to optimize inventory, augment sales and improve store productivity. We're seeing an uplift in stores where we enroll this out. Looking forward to the Q4, in the U. S, we're launching new ways to connect loyal shoppers to the best of the rebates brand with the new loyalty program and app, which will give consumers access to frictionless shopping, exclusive product, loyalty rewards and style inspiration. These platforms allow us to get closer to the consumer, and we will be rolling them out globally over the next year. Our strategies to diversify our global business are clearly working domestically and abroad. Our international business is approaching 60% of total revenues. Direct to consumer is heading to 40%. Women's is nearly a third of total revenues and tops is almost a quarter. In all of these areas, there remains a long runway for growth. And we're achieving all of this while keeping our commitment to doing right by people and the planet. In August, we released a global strategy to reduce our water usage by half and water stressed areas by 2025. We're also setting the standard for other apparel companies with our industry leading targets to reduce carbon emissions. In our long history incorporating sustainability in everything we do, not least of which is the supply chain disruption we're driving with Project FLX continues to reduce our reliance on precious resources, driving innovation across our business and resonating with younger consumers whose passion for the planet has been particularly visible of late. Now over to Harmit to review our Q3 performance and update our full year outlook. Harmit? Thank you, Chip, and welcome to everyone joining our call. My comments today will reference 3rd quarter comparisons on a year over year basis in U. S. Dollars, unless I indicate otherwise. 3rd quarter revenue of $1,450,000,000 dollars grew 4% on a reported basis and 5% in constant currency. The contributions by region, channel and category of the 5 points of constant currency growth were as follows: by region, 5 points of growth from Europe and 2 points from Asia were partially offset by lower sales in the Americas by channel, 3 points came from our company operated stores, one point from e commerce and one point from global wholesale. And by category, 6 points of growth generated by a diversification into Levi's women and tops was partially offset by a decline in Dockers. Levi's men's bottoms were flat for the quarter. 3rd quarter gross profit of $767,000,000 represents an increase of $25,000,000 despite $11,000,000 of unfavorable currency translation. Gross margin of 53% declined 20 basis points on a reported basis due to currency headwinds from a stronger U. S. Dollar. Excluding all currency effects, both translation and transaction, gross margin expanded by 40 basis points driven by the margin benefits of our direct to consumer and international growth. We're also starting to see benefits of the price increases we have taken globally which substantially mitigated the product investments we have made. 3rd quarter SG and A expense of $596,000,000 was up 2% over prior year. SG and A as a percentage of revenues improved by 60 basis points. High investments in direct to consumer expansion, technology and distribution capacity were more than offset by higher incentive compensation expense last year, reflecting performance significantly ahead of internal expectations in 2018 and a lower impact from previously cash settled stock based compensation awards. Additionally, we drove leverage on base cost this quarter, reflecting our cost discipline. 3rd quarter operating income of $171,000,000 was up 8% on a reported basis and up 9% on a constant currency basis. Operating margin expanded 40 basis points to 11.8% due to the lower incentive compensation expense. Adjusted EBIT, which excludes the impact from our previously cash settled stock based compensation awards, was $176,000,000 in the 3rd quarter, up 2% on a reported basis and up 4% on a constant currency basis. Adjusted EBIT margin was strong at 12.2%, reflecting our cost discipline as the 20 basis points decline compared to the prior year was due to the currency headwind in gross margin. Adjusted net income of $128,000,000 for the quarter was down $5,000,000 as the prior year benefited from $11,000,000 in discrete tax benefits that did not repeat this year. Adjusted diluted EPS for the Q3 of 2019 was $0.31 a 0 point benefits I just mentioned, in combination with the increase in our share count this year, adversely impacted the year over year adjusted diluted EPS comparison by 0 point 0 $5 Now I'll share more detail on the 3rd quarter results of our 3 regions in constant currency unless I state otherwise. In the Americas, net revenues were down 3% after being up 9% last year. Direct to consumer in the region grew 9%, reflecting the strength in the Levi's brand and execution in our stores where performance was positive, including positive comps in U. S. Outlets and which was augmented by strong double digit growth in e commerce. We anticipate our recently announced acquisition of a South American distributor will give us the opportunity to accelerate growth in this important region where the Levi's brand really resonates with the consumer. In anticipation of the acquisition, we didn't ship additional product to the distributor in the 3rd quarter and that adversely impacted growth in the Americas by about a point in this quarter, which was about 0.5 point to the total company. Beyond this impact, underlying performance in the Americas region, international markets remained strong. Within the U. S, strong direct to consumer growth of 7% partially offset the U. S. Wholesale decline. This year, we are comping the Dockers Line reset and sales to a financially distressed retailer, and we are reducing sales to off price, all of which we do not consider indicative of our underlying performance in the channel. Collectively, we've adversely impacted U. S. Wholesale comparisons by about 6 points in the quarter And we expect these factors to be a similar dollar magnitude in the aggregate in the 4th quarter, primarily driven by lower off price sales. Excluding these factors, U. S. Wholesale declined 4% in the Q3, reflecting the ongoing challenging environment in the channel. Importantly, given the diversification of the business over the last few years, this only equates to one point for the company overall, which we've been more than able to offset by areas of opportunity that are growing at a faster pace. U. S. Wholesale remains an important profitable channel, but keep in mind that our revenue algorithm does not assume growth in the U. S. Wholesale. Our strategies are targeted to managing it to flattish over time, and they're working. U. S. Wholesale is about flat year to date on an adjusted basis and we expect the full year to be similar. And even with the decline this quarter, the Americas as a region has grown 3% year to date, right in the middle of the range for this region in our growth algorithm. 3rd quarter operating income for the full Americas region declined 7%, more than the region's revenue as higher selling expenses offset a higher gross margin. Europe again posted outstanding growth, 14% on a reported basis and 18% in constant currency. And this despite a backdrop that remains challenging at retail amidst an increasingly uncertain macroeconomic climate. Revenue growth this quarter was again broad based across the region with double digit growth in men's and women's all product categories and both channels, where wholesale and bread to consumer each matched the region's 18% growth rate. The brand continues to be hot in Europe and the team continues to do an amazing job executing across all channels to support the brand's momentum. Europe's operating income grew 34% on a reported basis and 39% on a constant currency basis, reflecting the net revenues growth, a higher gross margin and leverage on SG and A. Asia also posted a strong quarter, notwithstanding macro volatility from tariff talks and protests in Hong Kong. The region's net revenues grew 9% on a reported basis and 12% in constant currency. Traditional wholesale, franchise and e commerce each grew double digits. Most markets in the region grew. The strongest growth in Asia this quarter was in India, partially due to a seasonal change in shipments vis a vis prior year. China grew modestly and remains a huge opportunity as it still represents only about 3% of total company revenue. Hong Kong was a notable exception in the region. The ongoing protests there impacted traffic and caused some of our stores to close temporarily, costing the region about a point of growth. Asia's operating income grew 18% on a reported basis and 25% on a constant currency basis, reflecting the net revenues growth and SG and A leverage. Turning to balance sheet and cash flows. In dollar term, inventory at the end of the 3rd quarter was nearly flat compared to a year prior, reflecting the deliberate measures we've taken in recent quarters to reduce and maintain the health of our inventory. Adjusted free cash flow of $28,000,000 for the 1st 9 months of 2019 was $42,000,000 higher compared to the 1st 9 months of 2018, despite higher CapEx investments and paying a higher dividend in the Q1 this year. Speaking of dividends, you may have seen our press release a couple weeks ago announcing an increase to the dividend we've been planning to pay in the coming weeks. At $0.15 per share, we now estimate a total payment of approximately 59,000,000 dollars a 7% increase as compared to the previously announced $55,000,000 Returning capital to shareholders is a key component of our total shareholder return. The higher dividend payment will bring fiscal 2019 dividend up to approximately $114,000,000 a 27% increase compared to 2018. With 3 quarters in the books, we are solidly on track to achieve our full year guidance. We expect full year constant currency revenue growth in the range of 5.5% to 6%. We are tightening our range now that we have only 1 quarter to go and incorporating the impact of the distributor acquisition we announced in August. As regards currency, due to a stronger U. S. Dollar, we expect currency translation will adversely impact the full year reported revenue growth by about 2 75 basis points. Given year to date constant currency revenue growth is 8%, Our constant currency guidance implies 4th quarter about flat to slightly down compared to the prior year. This reflects an adverse impact of about 500 basis points collectively from lack of a Black Friday, lower off price sales, the distributor acquisition in South America and the unrest in Hong Kong. None of these factors detract from the underlying strong health of the business. Turning to gross margin. We affirm our full year guidance and wanted to further clarify the currency impact embedded in our gross margin expectations. On a reported basis, we expect full year gross margin roughly in line with prior year's 53.8%. Excluding all currency effects, both translation and transaction, we expect full year gross margin expansion in the range of 40 to 60 basis points in line with our growth algorithm reflecting our geographic and channel diversification strategy. With respect to adjusted EBIT margin, on a reported basis, we expect full year adjusted EBIT margin roughly in line with prior year's 10.5%. And keep in mind that this year we won't have the 25 basis point benefit to fully adjusted EBIT margin that we normally get from Black Friday. Excluding the currency effects from translation, we expect adjusted EBIT margin to expand approximately 10 basis points. With respect to adjusted EBIT dollar growth, we expect currency translation will adversely impact the full year reported adjusted EBIT growth rate by about 4.50 basis points. In view of our year to date tax rate, we now expect a full year effective income tax rate in the range of 19% to 20%. Our 2019 CapEx expectation remains in the range of $190,000,000 to $200,000,000 and we continue to expect nearly 100 store opens on a gross basis this year. It is pertinent to note that our full year constant currency revenue guidance taking into consideration lack of Black Friday, the distributor acquisition and our strategic decision to reduce sales to off price in support of brand equity represents an organic growth rate of over 7%. Ahead of our growth algorithm and this is on top of 14% last year. Before turning to Q and A, a reminder on tariffs. While it remains difficult to predict what the future holds for tariff policy, we have proactively taken steps to insulate our business from the long term negative impact of these kinds of measures. As such, we believe we are less exposed than others and we estimate the impact of tariffs on imports in the U. S. From China will have a negligible financial impact to our business. With that, we'll take your questions. Thank you. The floor is now open for questions. Your first question comes from Matthew Boss with JPMorgan. We'll head with your question. Thanks for all the color guys. Maybe Chuck, on U. S. Wholesale revenues, as we think about the 4% adjusted underlying decline in the Q3 that you laid out ex some of those items, I guess, what's the magnitude of improvement that you're expecting as we think about the 4th quarter? Maybe how best to think about underlying U. S. Wholesale run rate as we think about next year? And just larger picture as we kind of parse through this, with the department store softness, does this impact your ability to drive mid single digit underlying revenues as we think about next year and beyond? So I'll answer your last question first and then come back and talk about U. S. Wholesale specifically. In short, I think our growth algorithm remains completely intact. Our ability to grow LSA in the 2% to 4% range remains unchanged. And it's fundamentally driven by the underlying strength of the revised brand across the full region, which is best evidenced by the strength of our DTC business. On wholesale, excluding those one time dynamics that we talked about, which was worth 6 points, but balance the underlying trend of our negative 4, as we said in the prepared remarks, we do expect that this is going to be the toughest comp for the quarter or for the year, toughest comp quarter for the full year. I think it's fair to assume over the long haul that we are going to be able to manage our U. S. Wholesale business to be about flattish. That's what we've been saying all along. We've really been focused on structurally evolving our U. S. Wholesale business to be sounder than it was as we entered the year. So things like exiting as much as possible the off price business, which comes at a really low gross margin and is not healthy for the brand as we do that. That strengthens our business structurally. And things like testing the brand in Target, which still is continuing to do really, really well at a very good price point, by the way. So I'm confident we're going to be able to maintain that business in the flattish in terms of total dollars. And as a percentage of our total business, it will continue to decline as we grow our faster growing businesses at DTC and International. Matt, As I mentioned, on an adjusted basis, if you take the three factors out, our U. S. Wholesale business is flattish on a year to date basis, and we expect the same for the year. In terms of anniversary, Dockers reset has been fairly minor in quarter 4, and we're resetting off price. We expect to have reset off price by Q1 of 2020. So we're anniversarying most of these onetime factors over the next quarter or so. Great. And then just one follow-up. On the gross margin, maybe Harmit, could you just walk us through the drivers of gross margin expansion in the Q4? And then just as we think multiyear, just maybe the puts and takes on the gross margin line. Thanks. Sure. So I think if you think of the quarter, our gross margin ex currency was up 40 basis points. I would say the expansion of direct to consumer and international helps gross margins 40 to 50 basis points. We have taken price increases globally in the U. S, Europe and Asia, and those price increases are offsetting our product investments. And then there is just saving on from sourcing and the like. So that's really what's driving us in quarter 4 because we are upping the top end of our gross margin range ex currency to 40 to 50 to 40 to 60. That's largely driven by the fact that we expect lower off price sales in quarter 4. And as Chip mentioned, those sales come at lower much, much lower margins. So that really benefits us. And currency, I think, in quarter 4 would be a much lower impact as you've seen in quarter 3. It's kind of progressively come down over the last couple of quarters. Does that help you, Mike? Mike? Your next question comes from Paul Lejuez with Citigroup. Thanks guys. Can you talk a little bit about the Europe business? I'm curious on the wholesale side, that revenue growth, how much of that is being driven by new doors this quarter versus same store sales? And same question for DTC, the percent driven by new store openings versus comp growth in that region. And then I guess just one follow-up on the U. S. Wholesale channel. Can you maybe break out for us how growth in the channel or contraction in the channel looks by department stores versus mass channel versus specialty? Thank you. So your first question was about Europe, right? Sure. So if you think about our business in Europe, our business in Europe was up 14% on top of mid teen growth last year. It was across all channels. So wholesale was up 18%. I think direct to consumer was up 18%. The channels are fairly really work together, fairly harmonious from that perspective. In terms of is it more doors or and is it comp sales? I would say our comp sales performance in Europe is probably the strongest around the world. We've had generally positive traffic in quarter 3 in Europe and in Asia. In the U. S, traffic in the outlook is slightly down, but more than offset through better conversion and conversion and increased unit per transaction, meaning positive comp. So I think it's a combination of both new doors as well as comp sales. The fun fact in Europe is between franchise and company doors, we're opening 1 new door a week on a gross basis. Okay. And just same on the wholesale side, is it mostly is it new accounts? Or is it the same accounts, same chains that you're just selling more to? It's largely the same chains we're selling more to, but we're selling more of lifestyle as our women's business and our tops business continues to grow. To build more for lifestyle, we are selling more products and obviously taking more floor space given the strength of the brand. Got you. Thanks, Ram. The question, Paul, just to answer your question on U. S. Wholesale, Chip talked about incremental penetration in premium retailers. So our premium business in U. S. Wholesale is up 8% for the quarter, 16% year to date. We are also growing our digital footprint in the U. S. And that's across pure players as well as wholesale.com. And that business in quarter 3 was up 20%. So again, the strategies are to grow premium and to continue to grow digital, and that's offsetting some of the traffic declines traditional department storage. Got you. Thank you. Good luck, guys. Thanks. Your next question comes from Bob Adirbal with Guggenheim Securities. Hi, good afternoon. Just a couple of questions for me. The first one is, can you just elaborate a little more on the target test? And I guess specifically, are you seeing any cannibalization with other retailers? Or do you think it's purely additive with the Red Tab? And I would also just be curious to know, within Target, do you think that it's impacting the Denizen brand at all? Okay. So, Bob. So, in part of the test, just to take everybody back, we started with the 20 door test early in the calendar year. They actually came to us. They had consumer research with their guests that indicated that the brand that they most wanted to buy in Target but couldn't buy was Levi's. The most searched item on target.com that people couldn't buy was Levi's. And so we started with a 20 door test just on men's. And in those 20 doors, we pulled Benazim. And so Levi's was purely incremental at really good price points. And it was Levi's men's, it was bottoms, tops and some trucker jackets. The bottoms, we included some of our latest, most contemporary fits like the 502, which was priced around $50 We quickly learned that the guests love finding new buys in their stores. We worked with Target to have great in store presentation. The merchandising is really well done. And the test, in short, it worked. We look very, very carefully at the impact of cannibalization because if this was purely a left pocket, right pocket, we're just shifting you guys from one customer to another and not gaining incremental share from this. We weren't interested in pursuing it. And we so we do a 5 mile radius around every test store, and we looked at the incrementality of the test and it was incremental. So we have now since now expanded to 50 doors on men's, and we have started a 20 door test on women's, which is also off to a very good start. You may recall, last quarter, I said full, full time services were really focused on the urban doors and the college town doors. And one of the things we're learning is we're converting a dungro target consumer who is shopping at the malls and they're discovering new buys at their target. And we're converting them on some of our premium wholesale product. So it feels really, really good. And it does appear to be truly incremental. So full potential, this is probably somewhere in the range of a couple of 100 doors, 200 doors or so. But we're continuing to work with the Target team that feel really good about the progress that we've made. And this is part of, as I said in the prepared remarks, this is part of evolving the structural nature of our U. S. Wholesale business, and this one seems to be a good one for us. Got it. Great. And just the second question is, on the marketing side, can you just talk about the plans for the Q4 and sort of how you're managing the marketing budget even as you look the next few quarters into the next year? Yes. From a financial standpoint, what we've guided is that we expect advertising to be about flattish for the full year, around 7% of revenues, and that implies that it's a little bit heavier in the 4th quarter, which is normal given the seasonality. And so we are going into the holiday season loaded and ready to bear. As I said, we've got a number of really strong collaborations. Connecting with consumers digitally around the world is really, really important. I talked about the collaboration that we've got with Q2 Dance in China, which really is awesome, and we're connecting with a young consumer through that and really marrying the virtual world, the digital world and the physical world with product that consumers can put on their avatar in the game and buy for themselves. So we've got a lot of exciting things that just continue to put the brand at the center of attention. And we will continue to build it down on our marketing. Every time we do it, it appears to be working. So we feel really confident as we go into the holiday that we've got a really strong program lined up for the Q4 and through the holiday season. Your next question comes from Alexandra Walvis with Goldman Sachs. Hey, guys. Thanks so much for taking the question. I wonder if you could dig a little bit more into the strategy with respect to off price. So could you remind us when the decline in sales to that channel started? Perhaps your views on how long that will continue? Any color on how big off prices as a percentage of the Americas business today would be helpful? And where do you see that going over time? Okay. So, hi, Alex. So first of all, just to back up, we don't make for off price. There are a lot of apparel manufacturers that see that as an ongoing channel. They build product specifically to hit those price points and they're kind of in there on an ongoing basis. We do not do that. We treat off price purely as a channel for selling distressed inventory. We sold a lot last year because part of the Dockers reset, as a matter of fact, we had to get rid of a lot of inventory. So we had a lot of it in the base period. We kind of our inventory position really started to get very clean as we were coming into Q2 of this year. So there will be some hangover on off price going through Q1 of next fiscal year. But our objective, as we continue to manage our inventories pretty aggressively, is to avoid using off price. We will only get off price when we are trying to get rid of distressed inventory. It's not healthy for from a brand management standpoint, and it's not certainly not attractive financially. But finding new guys in one of these off price customers at $14.99 just makes it really, really hard to sell Levi's at full price in this market. So that's how we're trying to manage it. The off price cycle will end in Q1 of 2020 from a lapping standpoint. Does that answer your question? It does indeed. Thanks very much. That's really helpful. One more, if you wouldn't mind me sneaking in and follow-up to some of the earlier questions. Could you give us any color on how fast Signature grew this quarter and then perhaps also Denizen given some of the measures that you're taking in target? Yes. So both of those brands were we didn't even talk about them in the prepared remarks. Both brands were essentially flat for the quarter. One of the things in Target, I did say that as we tested, we revised RevTabin Target, we pulled Benazin. We have had a conversation with Target about going back and testing Denizen because it plays at a very different price point. It targets a very different consumer. So going back into some of those original test stores and seeing what happens when we put Denizen back in incrementally. And Alex, the flat for the quarter was on the back of a 15% growth in quarter 3 of last year. Awesome. Thanks, guys. All the color. Your next question comes from Kimberly Greenberger with Morgan Stanley. I'm wondering if you can just talk about the accounting impact when you acquire distributor. Is there a sort of subsequent benefit in future quarters to revenue, to EBIT dollars? If you can just sort of walk us through how to think about the impact. And then understanding that you're not giving 2020 guidance today, I'm just wondering if you have a view of how we should, on a preliminary basis, think about FX impacts going into next year? And then lastly, China, you indicated, grew modestly in the quarter. I'm wondering if that's sort of meeting your expectations. And what are the sort of puts or takes in China as separate from Hong Kong? Thank you. Okay, Kim. Let me answer 1 and 2, and then Chip can answer China. So let's take the first one, which is the acquisition. Our distributor model is very similar to the wholesale model, which is it's a sell in model. So we sell into the distributor, their markup and book the consumer revenue at their end. The as we when we announced the transaction and the transaction is very consistent with capital, our philosophy to deploy capital to grow this business and actually growth in markets where we think we can drive the business faster than some of our partners. So the reason we stopped selling in quarter 3 and quarter 4 was largely to avoid the accounting issue that you're talking about, plus the distributor had enough inventory. And so in terms of the change in business model, what will happen is post the acquisition, the business model will move from an wholesale business model, where we were recognizing the revenues based on sell in to a consumer business model where we recognize revenues based on sell out. So that's the change. We will give a perspective on the impact of the acquisition in 2020 when we talk about 2020 guidance in early 2020 when we report quarter 4 earnings. We're in the process of taking a hard look on what is the impact of the business conversion, plus importantly, what are the dollars and cents we have to invest, whether it's in advertising, whether it's in organization. But intrinsically, we believe that this transaction is accretive to EPS over the long term and does accelerate growth in that market. So that's the question on the acquisition. To your question about FX, if I could predict FX, I'd be probably doing something very different. But what I would say right now is it's probably best to use today's rates as the best proxy. When we close out the year and talk about 2020, at that point, it will indicate the impact on 2020. But I think the best indicator is probably current spot rates. And the last question I think was Okay. So on China, I think just backing way up since we're new to a lot of you, China is still a huge opportunity for us. It represents about 3% of our total business overall. As we said in the prepared remarks, it grew 2% in the quarter, primarily driven by the strength of our business and company operated doors. We've been evolving our China business over the last couple of years. If you go back 2 fiscal years, we declined in China. Last fiscal year, we were flat. We took a number of steps in China last year to set ourselves up for success long term in China. So we took back a number of franchise stores in Beijing and Shanghai, where we own and operate our own stores. We stopped heavily discounting in Tmall, and now we're basically selling predominantly full price product. And we are now moving to premiumized and super premiumized that marketplace because that's what's working there if you look at other particularly look at other brands. So I talked a little bit about the same store that we opened in Lupin. It's 7,000 square feet. It's over 3 levels. That store features expansive sections for all of our premium collections, including Levi's Made and Crafted, Levi's Authorized Vintage and Levi's Vintage Clothing. It's also got a massive tailor shop. So we're putting kind of customization and personalization right at the forefront of everything. And we're going to continue to focus on strengthening and premiumizing the way the Levi's brand shows up in that marketplace. We've got a brand new team on the ground that's been that's led by Amy Yang, who we hired about a year ago. She's Chinese. And we're very, very optimistic that we've turned the corner, and we expect kind of much stronger results over the next couple of years as it represents one of the biggest opportunities we've got. Terrific. Thank you. Thanks, Tim. Your next question comes from Omar Syed with Evercore ISI. Thanks for taking my question. I guess I'll ask I wanted to ask about tops. It looks like it accelerated to the mid from mid teens to high teens. It's an area in your business or maybe there's been some skepticism about the sustainability and the fashion quotient there. But the graphic tees piece, I think you said, was only plus 6. So maybe help us deconstruct what's really working in that business, men's, women's, international? Is it all trucker jackets? And help us to think about some of the strategies going forward for that category. And clearly, you're being able to sustain the level of growth at a high rate, maybe perhaps higher than some had expected? Thanks. Thanks, Omar. Clearly, an underpenetrated opportunity for us. The acceleration quarter over quarter from that perspective is largely driven. If you think about our tops business, think of about onethree being tees made up the bulk of it graphic tees, onethree truckers and sweatshirt and a third, woven and other stuff that we don't sell a lot of and there's a huge opportunity, I think, Polo, features from that perspective. The acceleration in quarter 3 relative to quarter 2 was driven by truckers in sweatshirts really growing at a much faster clip than the average that we indicated of 17%. And as you think about our longer term opportunities, just get a preview of what's coming on the pipe for H1 and H2 of 2020, I think we're really focusing on the other opportunities we have, I think, is what makes us confident that we've been continuing to grow this for a long, long time. We have time for one more question. Your next question comes from Dana Telsey with Telsey Advisory Group. As you think about the wholesale business and the shift that's going on whether it's more premium or to Target, how do you see department store penetration changing? Will we see a shift in the account base of wholesale? And just lastly on price increases that you mentioned, which were began to be initiated, is that globally? And how does it range by category? Yes. I guess I'll take the wholesale footprint piece. I mean, as we've said before, the channel, especially department stores and the large chain stores, which is the bulk of our legacy wholesale business, it's facing structural headwinds and challenges. And one customer has gone bankrupt. That customer used to be our biggest single wholesale customer not even 10 years ago, and they are almost gone. And so there's going to continue to be more closures. We're going to continue to see these customers that are overstored cutting from the bottom up. To date, fiscal year to date, we faced over 700 doors that have closed where we were in distribution, and that is going to continue for the foreseeable future. And so our commitment has been to continue to run this business to try to manage the revenue, which is profitable revenue in this channel to be about flat over time. I think it's inevitable that we will see a shift in what that footprint looks like as some of these bigger legacy customers close doors that they need to close. And we are back in the market and trying to preserve our wholesale business by being in the right place at the right time. And I can't crystal ball exactly what it's going to look like in 3 years or 5 years, but our commitment is to and what's built into the growth algorithm is that we will be able to maintain this business about flattish over time. And if you look at our track record, that's what we've been able to do despite all of the headwinds over the last 3 plus years. So I'm confident in our ability to be able to continue to do that. And Dana, quickly, to answer your question about pricing, we had both during the roadshow as well as when we've met with all of the last couple of weeks, we had said pricing is an opportunity for us. The brand has pricing power. We have taken several pricing actions globally. For example, in the U. S, we raised prices on some of our trips, the $502,000,000 the $514,000,000 by $10 and it's largely sticking. We've taken several actions in Europe and Asia. In Europe, in different markets, we have taken pricing between 3% 5%, similar in Asia. That's generally sticking. We're seeing an increase in AURs, and that's indicated plus just the performance. If you look at what's happening in Europe and Asia, there's this indicator of the fact that the brands are going to be able to take pricing. So as you think about pricing strategies longer term, it's all about pricing for inflation and trying to offset currency in one bucket. It's about reducing knockdowns where we can. And thirdly, it's about pricing for innovation. We did price in the second half for Levi's engineered jeans in Asia. And for example, that's also helping. At this time, I'd like to turn the floor back over to the company for any closing remarks. I was just about to go there. So with that, I suspect we will probably be the 1st earnings call to wrap by wishing you all a happy holiday because we won't be back with you all until after the holidays when we report our Q4. So I wish you all very happy holiday. We'll talk to you again in the new calendar year. Thank you all for dialing in today. Thank you. This concludes today's conference call. Please disconnect your line at this time.