Good day, ladies and gentlemen, and welcome to Levi Strauss & Co. second quarter earnings conference call for the period ending May 26th, 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 two hours after the completion of this call through July 15th, 2019. Please use conference ID 826.329. This conference call also is being broadcast over the internet, and a replay of the webcast will be accessible for one quarter on the company's website, levistrauss.com. At this time, I would now like to turn the call over to Aida Orphan, Senior Director, Investor Relations and Risk Management at Levi Strauss & Co.
Good afternoon, and welcome to our quarterly conference call. I'm pleased to introduce members of the Levi Strauss & Co. management team, Chip Bergh, 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-K, our registration statement, today's earnings press release, and our other filings with the SEC, all of which are available on our website at levistrauss.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 Bergh.
Thank you, Aida. Thanks everyone for joining us today. Against a difficult backdrop, we had a strong quarter with revenues of $1.3 billion, up 5% from prior year on a reported basis and up 9% in constant currency. This brings year-to-date revenue growth to 10% in constant currency. Growth continued to be broad-based across regions and brands in the second quarter, reflecting the strength of our more diversified portfolio. Here are some of the key themes from the quarter, all in constant currency and versus prior year. Each of our regions grew revenues and profits, with Europe and Asia growing revenues double digits. All four brands grew. The men's business grew 6%, and the women's business grew 16%. Bottoms were up 8%, tops were up 14%, and global wholesale was up 6%, while our global direct-to-consumer business was up 14%.
The Levi's brand remained strong and grew 10% this quarter. We grew in all three regions across men's, women's, tops, and bottoms and continued to strengthen our lifestyle brand appeal with consumers around the world. In the second quarter, we again dominated Coachella as the go-to uniform for festival season with Levi's 501 cutoff shorts, which were up more than 50% this quarter, taking center stage. Our successful execution festival drove a 50% increase in impressions versus a year ago. In May, we held a month-long 501 Day celebration focused on the birth of the blue jean with customization events taking place around the world and limited edition product design and partnership with San Francisco native Heron Preston, featuring Hailey Bieber as the face of the 501. We teamed up with BEAMS in Japan to create a capsule collection combining our iconic design and craftsmanship with BEAMS' esteemed Japanese style.
In Europe, we launched Use Your Voice, a new ad that celebrates the power of individuals in igniting change. I'll now walk you through our second quarter results in the context of our three where-to-play strategic choices, which are drive the profitable core, expand for more, and become a leading world-class omni-channel retailer. First, on the profitable core business, which, as a reminder, is comprised of men's bottoms, our top 10 wholesale customers, and our top five mature markets. Our total men's bottoms business, our biggest business, was up 5% for the quarter. Performance-focused fabrics with higher stretch content and tapered silhouettes continue to resonate with consumers. The 502, 512, and 514 drove global growth, while newer products, such as the Levi's Engineered Jeans, performed well internationally. Dockers grew 1% globally.
Our top 10 global wholesale accounts collectively grew 6%, and our top five mature markets collectively grew 6%, inclusive of our largest market, the U.S., which was up 1%, while the other four markets grew 20% collectively. Our second strategy is to diversify the business by expanding for more into tops, women's, under-penetrated markets, and with our value brands. While we've made good progress, the future growth opportunity in these areas remains significant. Our total women's business grew 16% in the quarter, which was the 16th consecutive quarter of growth in women's, with each of the last 10 quarters being double-digit growth. The business grew across all regions and channels, fueled by the success of our high rise fits and helping sales of women's tops. Tops for both men and women continue to perform well.
Our total tops business grew double digits again this quarter at 14%, driven by strong performance in sweatshirts and trucker jackets. Graphic tees grew slightly in the quarter. While tees remain a big business for us, we're still selling a graphic tee per second. Our growth in tops this quarter went beyond tees, demonstrating our ongoing diversification in the category. Our Signature jeans and brands collectively delivered 9% growth on top of the 60% growth in the second quarter of last year. While we continue to post growth in the U.S., we are rolling these brands out in the new markets as well. Our performance in China was positive, yet remains far from its potential.
Our revenues increased 3% this quarter, driven by strong performance in our company-operated brick-and-mortar stores and e-commerce growth, which more than offset a decline in our franchise business as we execute our strategy in China. We are confident in strategy and the team on the ground. There is still a lot of heavy lifting to do. In our business in other emerging markets of India, Russia, and Brazil, were up double digits. The third strategy is to become a leading world-class omni-channel retailer. Direct-to-consumer, which for us includes the brick-and-mortar stores and e-commerce sites we operate, grew 14% for the quarter in total and has now grown double digits for 13 consecutive quarters. Revenue growth in our brick-and-mortar stores was up 12%, reflecting positive comp performance and ongoing expansion of the company-operated store network, which had 78 more stores by the end of the quarter than the year prior.
Our e-commerce growth was again very strong, up 25% for the quarter with increased traffic in all three regions. We continue to enhance our omni-channel capabilities. We've begun to roll out a ship-from-store program in the U.S., which will allow us to optimize inventory, augment sales, and improve store productivity. Now, over to Harmit to review our second quarter and first half performance in greater detail. Harmit?
Thanks, Chip, and welcome to everyone joining our call. My comments today will reference second quarter comparisons on a year-over-year basis in U.S. dollars, unless I indicate otherwise. Second quarter revenue of $1.3 billion grew 5% on a reported basis and 9% in constant currency. Our growth was broad-based and the contributions by region, channel, and category of the nine points of constant currency growth were as follows. By region, two points of growth came from the Americas, five points from Europe, and two points from Asia. By channel, four points came from wholesale growth, four points from our company-operated stores, and one point from e-commerce. By category, three points came from growth in men's bottoms, and the remaining six points came from women's and tops. Second quarter gross profit of $700 million represents an increase of $30 million, despite $25 million of unfavorable currency translation.
Reported gross profit for the quarter grew 4%, slightly lagging revenue growth at second quarter gross margin of 53.3%, decline 60 basis points. The margin decline was driven by unfavorable currency impact of 100 basis points, as well as product investment. These were partially offset by margin benefits from our direct-to-consumer growth and lower discounted sales. Second quarter SG&A expense of $638 million was up 7% over prior and increased as a percentage of revenues by 90 basis points, primarily reflecting the timing of spend for our 2019 advertising campaign that we told you about on our last call. The increase was partially offset by $19 million of favorable currency impact. Beyond the higher advertising spend, SG&A as a percent of revenues was flat to prior, as high investments in distribution capacity and direct-to-consumer expansion were fully offset by leverage on our base cost.
Something we expect will continue as our revenues grow. Second quarter adjusted EBIT of $82 million was down 4% on a reported basis, but grew 3% on a constant currency basis. Constant currency adjusted EBIT margin of 6.2% declined 40 basis points due to the timing of advertising spend, which as I noted, was up 90 basis points versus last year. Adjusted net income of $69 million was down 17% from last year's $83 million, reflecting lower net gains on our foreign exchange derivatives and a stronger U.S. dollar. Adjusted diluted EPS for the second quarter of 2019 was $0.17. Let me repeat, $0.17, which is down 21% over prior year. The EPS decline was greater than adjusted net income decline due to the shares re-issued in connection with our IPO.
Note that adjusted EBIT and adjusted net income are non-GAAP measures that exclude the impact of changes in fair value on our previously cash-settled stock-based compensation awards, as well as $29 million in IPO related costs. Inclusive of the $25 million underwriter fee we paid on behalf of the selling shareholders. Please refer to our press release for a reconciliation of the non-GAAP measures we use, including adjusted EBIT and adjusted net income. I'll share more detail on the second quarter results of our three regions in constant currency, unless I state otherwise. In the Americas, net revenues grew 3% on a reported basis and 4% on a constant currency basis, reflecting an increase across both channels. Wholesale growth of 2% was driven by strong performance in the region's international markets.
Direct-to-consumer growth of 9% was driven primarily by the expansion of our company-operated retail network and higher e-commerce revenue. Our largest market, the U.S., was up 1% as direct-to-consumer growth of 7%, driven by e-commerce and new doors, offset a 2% decline in U.S. wholesale. The U.S. wholesale decline was attributable to the impact of the bankruptcies and door closures that some of our customers have experienced over the last year. As well as a decline in discounted sales through the off-price channel, reflecting that we are carrying substantially healthier inventory in comparison to the prior year. We will remain focused on optimizing execution in the U.S. wholesale channel going forward, but we do expect ongoing pressure for the remainder of the year due to a weak department store environment, continued door closures, and pressure on our customers' open-to-buy budgets.
The U.S. market is unlike any other in the world due to the dominance of wholesale, our opportunity is to continue to diversify across channels, products, genders, and customers as we are doing elsewhere. Operating income for the full Americas region grew 5% on both reported and constant currency basis, as higher net revenues and higher gross margins were partially offset by direct-to-consumer expansion and the planned increase in advertising. We are pleased with the momentum that continues in Europe. Against a backdrop of geopolitical volatility, including Brexit, bankruptcies of a few wholesale customers in the U.K., and weakening economies, the region posted net revenue growth of 9% on a reported basis and 18% in constant currency. This was on the back of 19% constant currency growth a year ago. Revenue growth this quarter was again broad-based across genders, channels, markets, and product categories.
Wholesale grew 14%. Direct-to-consumer was up 22%. The strong direct-to-consumer growth was driven by higher traffic and conversion rates in existing stores. In addition to new company-operated stores and e-commerce growth of 28%. Levi's men's bottom growth was strong, up 18%, and women's continued to perform with double-digit growth in both tops and bottoms. The region's operating income grew 10% on a reported basis and 22% on a constant currency basis, reflecting the net revenue growth and a higher gross margin from a shift towards the direct-to-consumer channel, partially offset by higher direct-to-consumer and distribution costs and an increase in advertising and promotion. In Asia, net revenues were up 6% on a reported basis and 12% in constant currency. Traditional wholesale, company-operated brick and mortar, and e-commerce each grew double digits, supported by higher traffic in the region.
Most markets grew double digits, with the biggest dollar contribution coming from Levi's men's bottom, which grew 10% over prior year. China's revenues grew again on strong performance of company-operated stores and e-commerce channels. We continue to make progress in that critical market. Though we still have more work to do in the franchise channel over the next year. The regions' operating income grew 4% on a reported basis and 15% on a constant currency basis, reflecting the net revenue growth and SG&A leverage, partially offset by lower gross margin reflecting higher product costs. With two quarters behind us, I'll now review our year-to-date results. First half revenues grew 6% on a reported basis and 10% on a constant currency basis, reflecting broad-based growth across all three regions. Global wholesale grew 7%, while global direct-to-consumer was up 14%, both in constant currency. We have further diversified the business.
International is now 58% of total revenues. Direct-to-consumer is 39%. Women's is 32%, and tops is 21%. Gross margin of 54% for the first half of the year was down 40 basis points, primarily driven by 90 basis points of unfavorable currency impact. The currency-neutral margin expansion primarily reflected direct-to-consumer growth, which more than offset margin pressure from product investments. Our first half SG&A ratio of 44.4%, declining 30 basis points from prior year, despite higher direct-to-consumer investment reflecting leverage on our base cost. As a percentage of revenues, advertising spend was in line with prior year, as we discussed last quarter. First half adjusted EBIT of $288 million grew 8% on a reported basis and 16% on a constant currency basis. Adjusted EBIT margin expanded 20 basis points on a reported basis and 60 basis points on a constant currency basis.
Dollars and margins both benefited from the higher revenues and SG&A leverage. Our first half adjusted net income of $220 million grew 32%, reflecting the $22 million adjusted EBIT increase, as well as the fact that last year we recorded a $38 million tax charge on undistributed foreign earnings in connection with the U.S. tax law change. Adjusted diluted EPS for the first half of 2019 was $0.55, which is up 27% over prior, again reflecting some increased dilution from first half adjusted net income growth due to the shares we issued in connection with our IPO. On to balance sheet and cash flows. In dollar terms, inventory was up 6% compared to a year ago, which is in line with revenue growth.
Year-over-year inventory growth has steadily come down over the last two quarters, from 16% at year-end and 11% at Q1, reflecting the deliberate measures we have taken in recent quarters. Accordingly, our inventory is very healthy headed into the second half of the year. Total available liquidity at quarter end was more than $1.7 billion, comprised of cash of $861 million, short-term investments of $80 million, and $806 million available under our credit facility. The higher cash balance reflects the proceeds from our recent IPO. Net debt at the end of the second quarter was $82 million, down from $359 million last year, and our leverage ratio declined to 1.4 compared to 1.5 a year ago. Cash from operations for the first six months of 2019 of $162 million was $66 million lower than the first six months of 2018.
The decrease primarily reflects our inventory build at the end of 2018. Higher payments in Q1 2019 for employee incentive compensation earned on our 2018 performance. The $25 million underwriter fee we paid on behalf of the selling shareholders in our IPO. These uses of cash were partially offset by lower contributions to our pension plan, which we funded last year before the new U.S. tax law went into effect. Adjusted free cash flow of $39 million for the first six months of 2019 represents a $42 million decrease compared to the first six months of 2018. This is primarily due to the $66 million decline in cash from operations I noted a moment ago, $16 million higher capital expenditure, and our first half dividend payment of $55 million, which was $10 million higher than last year.
With the first half of the year behind us, we are updating our full-year guidance in constant currency. Recall, we've been guiding full-year revenue growth in the mid-single digits. We now expect to deliver at the high end of that range. Growth will be broad-based, with all regions and channels growing. While underlying business trends remain positive, there are few reasons we expect second half sales growth to moderate relative to the first half, particularly in the United States. First, the lack of a Black Friday in Q4, which we expect will adversely impact the second half by roughly 100 basis points.
Additionally, we anticipate that pressure in the wholesale channel will adversely impact us by roughly 200 basis points in the second half due to the bankruptcies and store closures since a year ago, the overall softening U.S. wholesale environment, and the lower off-price channel sales reflecting our healthier inventory position. We reaffirm our expectation that growth margin and SG&A as a percentage of revenue will both be slightly up on a constant currency basis, primarily reflecting continued growth and investment in the direct-to-consumer channel. Given our strong first half performance, we now expect constant currency adjusted EBIT margin to be slightly up to prior year in the range of 10 basis points. This is despite an adverse full year impact of 25 basis points due to the absence of Black Friday. Finally, we now expect a lower effective tax rate for the full year of around 21%.
With respect to currency, we anticipate that the unfavorable currency translation impact to revenue and adjusted EBIT will be much less significant in the second half of the year. We now expect full year unfavorable impacts of 250 and 400 basis points to our revenues and adjusted EBIT growth rates, respectively. Before turning to Q&A, I want to take a moment to discuss the potential impact of tariffs. Tariffs have been on again, off again recently, and it's difficult to predict what the future holds for tariff policy. As we have previously communicated, we have taken steps to insulate our business from the long-term negative impact of these kind of measures. Should additional tariffs be enacted on imports to the U.S. from China and Mexico, we can mitigate the financial impact to our business over the near term. With that, we'll take your questions.
Thank you. The floor is now open for questions. If you have a question, please press star then the number one on your telephone keypad. Due to time constraints, the company requests that you ask only one question. If you have an additional question, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound sign. Your first question comes from Matthew Boss with JPMorgan.
Thanks, congrats on a nice quarter, guys.
Thanks, Matt.
Chip, maybe can you elaborate on the brand's global momentum, maybe how you see innovation fueling the next leg of top-line growth, and just touch on some of the incremental growth drivers as we think about FLX, data analytics, CRM, and loyalty?
Great question, Matt. First, I like to say this company was founded on innovation is kind of in our lifeblood. When we're successful innovating, it does drive our business results. That's why, and you've been there, that's why the very first investment we made when I became CEO was the Eureka Innovation Center right up the street to really send a signal about the importance of innovation. It is in our lifeblood. Now, I like to think about it in a couple of different buckets. There's the product bucket, there's the commercial bucket, and then, in this new world, there is the digital disruption bucket, which kind of spills over to everything. The digital disruption piece is one of my top agenda items. I really do believe it's got to be something driven from the top, from the CEO.
Let me focus on that one first. You mentioned FLX. That is digital disruption of how we finish a pair of jeans. We use lasers instead of hand finishing, over time, that is going to drive a fairly significant savings in production cost because we're finishing it with a machine instead of people. It should, over time, also deliver some balance sheet benefits from the supply chain and inventory benefits as well. Today, about 25% or so of the Levi's denim bottoms business on a global basis is finished with FLX. That should ramp. The full potential is about half of our total bottoms business, so we should ramp from 25% to that full potential over the next two years or so, through 2021. The other thing, we've already announced this, I think you will see it this quarter here in the U.S.
We're going to begin to give consumers an opportunity to personalize or customize their own jeans online using the FLX technology. They'll be able to go online and design their own jeans, in a couple of days, it will arrive on their doorstep. We'll charge a premium for it. It's going to be a really cool experience. Some of you have had an opportunity to experiment with it yourself, that's going to roll out here pretty quickly in the United States. As I said, we're going to premium price that. Another big opportunity area for us is to really take advantage of all the data that we've got. We collect a ton of data that we really have not done a lot with. We recently hired Katia Walsh a s our SVP of Strategy and AI.
She's really a machine learning expert, Dr. Katia Walsh, I should say. If you think about opportunities for us to leverage data to just get better and smarter at where and how we operate, some of the big buckets of opportunities to leverage machine learning are pricing, where we've got a number of opportunities. Assortment strategy, both at a macro level, on a global basis, how we assort online, but also literally down to the store level and how we optimize our assortments down to the store level. We've tested this already. We've seen a pretty significant improvement in store-level results where we optimize based on the consumer that's shopping in that store. There are also opportunities to get better at forecasting using machine learning.
A computer can do it better than people can most of the time, and so we'll leverage that. The opportunities are really almost endless. We're testing using machine learning to help us do a better job predicting future store locations based on changes in traffic patterns in markets like China. [audio distortion] opportunities there. We've got opportunities on CRM and loyalty programs. We do have loyalty programs in a couple of parts of the world. We're going to be testing a new loyalty program here in the U.S..
U nlike a lot of loyalty programs where they're point-based and get a discount, we're going to really try to link our loyalty programs back to giving our biggest fans great Levi's experiences and really tapping into the experience network, and that we really can drive. Making it really something only Levi's can do. We've got lots of room for innovation as you think about it from a product standpoint, from a commercial standpoint, from a go-to-market standpoint. Leveraging e-commerce and some of the innovation that we're doing in e-commerce, including the FLX personalization, which will happen coming up real soon. It gives me confidence that innovation is going to continue to drive our momentum.
Your next question comes from Paul Lejuez from Citi.
Hey, guys. Paul Lejuez. Can you maybe talk about the growth that you're seeing in the China business, whether you saw more volatility over the quarter? Just given the recent trade talks, curious how that's affected your business. You've talked a lot about the long-term China opportunity, but I'm curious, what is your research showing about how the brand is viewed there, and when do you expect an acceleration in China? Thanks.
Let's just cover the facts first. China is about 3% of our business. It's about 20% of the apparel category globally. Clearly it represents a significant untapped opportunity for us. We have been growing there now for the last couple of quarters, but as we said in the prepared remarks, it is a little bit of a heavy lift. We spent the last 18 months or so on closing a number of poor performing doors, mostly franchise doors, cleaning up our store footprint. There is still more work to be done there, to be clear. We cleaned up inventory about a year ago, so we've got a pretty good clean inventory position. As we said in the prepared remarks, we were pretty pleased with the results that we delivered in our owned and operated stores and our e-commerce business. Growth was 3%.
The strength that we saw in the businesses that we control just offset continued softness in the franchise network. We do have a strategy. Actually, our last board meeting was in China and Hong Kong. We spent a full day in the market with our board of directors. We actually split them and we went to three different locations. One group went to Hangzhou, one group went to Shanghai, and one group went to Wuhan and spent a full day in the market. Then we did our meeting in Hong Kong and reviewed our strategy for China. As I said, feel very strong about the team that we've got in place there as well as the strategy. We should see accelerated growth in the next 12 months or so. We still have some cleanup to do.
We still have to optimize our franchise partners, and there's some work going on there. We still have some doors to clean up. We're also starting to focus on building the right kind of doors. One of the reasons one of the groups from the board of directors went to Wuhan is we're going to open our largest store in China in a couple of months in Wuhan with one of our best, strongest franchise partners there. It's going to provide a beacon for what is possible for Levi's. On your question about are we seeing any blowback from the trade tensions, I think you're really asking about consumer blowback. The short answer is no.
There's been no negative Chinese consumer backlash against the Levi's brand. Our business was up this quarter there, and our owned and operated business was up even more. There hasn't really been any significant negativity in the press or anything else about Levi's or strong American iconic brands. I know that market really well too. I spend a lot of time there. My wife was born and raised in China. Our business is strong. The equity of the brand there is very strong. We've seen that. Now we just have to build on it.
Your next question comes from Alex Walvis from Goldman Sachs.
Hi there. Thanks for taking the question. I wanted to dig a little bit into the U.S. wholesale business. You talked about the growth rate there being -2%. You helped us out with some of the headwinds that you're seeing in the business. I wonder if you could help us to parse out between how much of the headwind is from bankruptcies and store closures versus existing doors and ongoing doors. Could you parse between off-price, mass, and department stores? Perhaps you could give us a little bit more color on what's embedded in the outlook for the North America or U.S. wholesale business, specifically in each of those areas? Thanks so much.
Alex, in terms of the decline in the U.S., in terms of U.S. wholesale, about 2/3 was what I call a combination of bankruptcies, store closures, and a softer environment. About 1/3 was the fact that we reduced our discounted sales or incentive sales. We feel good about that, thanks to having healthy inventory from that perspective. To think about the U.S. and our business in the U.S., and how we are focused on growing it, the U.S. is different from the rest of the world because it's dominant in wholesale. The men's bottom business is a larger piece of the business. We are focused on growing direct-to-consumer. Direct-to-consumer results have been great. We're focused on growing and expanding product categories.
Our women's business is growing, our tops business is growing, but it's still pretty small relative to other parts of the world. As you think about the U.S. business and what gives us real confidence, it is about protecting our core, which is growing the U.S. wholesale business, but doing that by focusing on customers outside the top or the Big Four or the Big Five, as well as driving category and product expansion. Chip talked about innovation. FLX, as an example, is being rolled out in the U.S., and that will, over time, allow us to chase faster into trends. I think long term, we feel good about it, but structurally, there are clear opportunities as we diversify the business.
Your next question comes from Omar Saad with Evercore ISI.
Thanks for taking my question. Congratulations on another great quarter. I wanted to ask my question about digital marketing more generally. My binge-watched "Stranger Things" with my kids over the holiday. It's great to see you guys continue to do interesting collaborations like that, putting the brand at the center of culture. It still seems like there's marketing and advertising and getting the word out that Levi's is back in such a big way with such great products across men's and women's. Getting that word out seems like it's still such a big opportunity for the company. The number of followers on Instagram, for example, seems pretty low for a brand of this stature. From the consumer standpoint, there's still no Levi's app.
Is greater marketing spend, especially in digital, is this the biggest near-term opportunity, medium-term opportunity for the company? Should we expect you guys, if there's continued revenue upside, to be tying that back into the business, into digital marketing and more marketing spend broadly speaking? Is that the right way to think about it? Maybe any other thoughts you have to expand on the topic? Thanks.
I'm sitting here, Omar, smiling. It's music to my ears. I think the short answer is yes. We put a lot of emphasis on our digital marketing, but there's still a lot of opportunity there. I like to say the very best marketing going all the way back to the beginning of time is word of mouth. Word of mouth today is Instagram and Snapchat, and that's how consumers are learning about things. Shoppable social media is coming really fast, and it already exists in a big way in China. We've got to be all over that. It does represent an upside opportunity. I should have mentioned it when I was talking about innovation, but we have a Levi's app coming real soon, too. You'll see that before the end of the fiscal year as well. It does represent a big opportunity.
Television advertising still works, we will continue to do TV advertising. Continuing to double down on digital, that's how to connect with the young consumer. We're doing our best, and I'm open to any and all great ideas. I'm glad you love the "Stranger Things" collaboration. I actually got an SMS from my son in Singapore saying, "I can't believe you've done that. That is so cool." It's really resonating, and it does speak to the power of some of these collaborations and how it can just put us right at the center of culture when we nail one like that.
Your next question comes from Heather Balsky from Bank of America.
Thanks for taking my question. I was hoping you could dig in a little bit more on your commentary about overall softness in U.S. wholesale. Is that just a remark related to what you've been seeing for a while, or has there been any sort of change in sellout trends or how your wholesale partners are managing inventory? Just any commentary to explain what you're seeing and whether your sort of outlook has changed in that channel? Thanks.
U.S. wholesale has been a challenging dynamic for now a couple of years, right? We've been talking about U.S. wholesale for a long time, and the industry has been talking about it. It's a little bit of a melting iceberg. The reality of bankruptcies that have happened over the last couple of months and the acceleration of door closures associated with that and other customers trying to pare back their store footprint, has become more and more of an impact here of late. Our U.S. wholesale business was down 2%. It's the first quarter in a while where we've actually gone backwards. I think it's $7 million in total dollars, but it's still going backwards. Customers are managing their inventory tighter, and the way they do that is they tighten up their open-to-buy budgets.
What we have going for us relative to a lot of other brands in the marketplace today is we do have a lot of momentum. We can point to our owned and operated retail stores in the U.S. and point to growth there. We've got proof points, even in the same market, that the brand is resonating and that they should be allocating their smaller open-to-buy budgets to us and allocating more space to us. That's a big part of what we're trying to work with our biggest customers and partners. We've also been trying to offset or mitigate some of these headwinds by expanding our footprint in U.S. wholesale. We've expanded more premium business. I believe our premium business was up 3% this quarter in U.S. wholesale. That's good. That's progress. It's not enough to offset the declines in some of the bigger customers.
It's going to continue to be challenging. As customers close doors, they're closing from the bottom of their lists going up, and they're starting to cut into bigger doors that represent bigger business for us. I guess what I would say is, the good news is we are all over this. We don't have our head in the sand. We've got strategies in place, and we are trying to mitigate and offset the impact of door closures and bankruptcies by expanding our footprint with other customers, testing innovative things with customers. We've been testing a concession model with Macy's, for example, in six stores. That looks very promising.
Potential to expand that. We've been testing Levi's in Target. That looks promising. The potential to expand that. These can all help offset softness in some of the other more challenged wholesale customers. It's going to continue to be a tough slog. There's no question about it. When you think about it, U.S. wholesale is about a third of this company's total business. We've got to figure out how we mitigate the risk of the headwinds, which we know are inevitable.
If you don't mind I'd add, Heather, you've seen the diversification of the business happen over time. The fact that we can grow at the pace we are growing despite the U.S. wholesale declining 2%, I think speaks for the broad-based and global footprint that we have. Even if our men's bottom business is soft in one market, we're making that and more by expanding in different product categories. We're doing that in a way that margins are over time either flat or accretive, not dilutive. I think that's the more important piece of how you think about our story.
Your next question comes from Bob Drbul with Guggenheim.
Good afternoon. I guess with Harmit, could you talk a little bit more around gross margin performance and maybe the buckets, positive or negative? Can you just give us a little bit of color around the expectations of gross margin, the outlook for gross margin in the back half, maybe ex currency?
Sure Bob. Thanks for asking that. Our gross margins for the quarter were down 60 basis points. It is largely driven by 100 basis points impact of unfavorable currency. Excluding that gross margin, they're up 40 basis points for the quarter and I believe 50 basis points for the first half of the year. The growth in constant currency gross margins is largely driven by the growth in our direct-to-consumer business. We have reduced incentive sales. That's making a big contribution, so markdowns are lower. We did invest in products. Our LEJ, our Levi's Engineered Jean, that was launched internationally cost us a little bit more. We are taking pricing now in Asia and Europe to offset that in the second half. Those are the factors that are contributing to constant currency margin increase in the first half.
As you think about the second half, your question about what is gross margins in second half X currency, I would say about 50-60 basis points increase, second half to second half, second half 2019 to second half 2018. The prime driver to that is four basic things. We think the impact of currency would be less, but I've talked about constant margins. The constant margin is less incentive sales in the second half. We are taking pricing. We're taking pricing in Europe, we've taken pricing in Asia, we've taken some pricing in the U.S.. Continued growth of our direct-to-consumer business, especially as wholesale is under pressure. I think those factors contribute to the growth in gross margins in the second half on a constant currency basis.
Your next question comes from Kimberly Greenberger with Morgan Stanley.
Thank you, Harmit. That was a really helpful rundown on gross margin. I guess, I just wanted to follow up on it. If you think about sort of your expectations six months ago, for example, on the way gross margin would come out, I guess, how did the second quarter gross margin differ from perhaps what you might have expected?
Largely currencies, I would say. Currencies, the impact of the euro was a lot more dramatic both in quarter one and quarter two. As you know, the euro started weakening in the second half of last year, that's why we think the expectation for the second half is probably not as much. We did make some product investments about a year ago as we started launching products, as I just mentioned, Levi's Engineered Jeans, as well as we've broadened our products in the tops category. We're taking pricing. As we said during the roadshow, and we are reinforcing it, we think we have pricing opportunities, whether as we roll out FLX and as we are able to put in more investment in our products and obviously price for it. I think over time you'll see pricing becoming a bigger piece of our gross margin driver.
Your next question comes from Dana Telsey with Telsey Advisory Group.
Good afternoon, and congratulations on the nice quarter. As you think about the other categories, tops and women's, the value brands, what are you seeing there? Does it differ by region? Harmit, when you just talked about taking price, is it on those categories also, and how much of a price increase would you take? Thank you.
T aking pricing on some of the value brands is difficult because it's a pretty competitive environment. We spend the time ensuring our products across the value brand, Signature, Denizen, are relevant. If you've had the opportunity to wear some of those products, you'll appreciate what I'm saying. In terms of expanding our value brands.
The value brands the last couple of years have really grown well, and that's largely because we've been able to bring up more relevant products and also expand the distribution in the U.S. and we're now expanding distribution of these brands in some of the emerging markets. We launched Denizen across wholesale channel and a value retailer in India. We have expanded Denizen and Signature in Mexico, and we're testing Signature in China. We are expanding, but we're doing it in a way that we ensure it doesn't really cannibalize or denigrate the main product, which is the Red Tab.
Your final question comes from Hale Holden with Barclays.
Thanks for taking the call. Chip, last year you guys had a very active presence on Amazon Prime Day. I was wondering if this year, given the lower flow-through of sales to the discount channel, we'd see a change in that, or is that just a separate discussion?
Short answer is it's a separate discussion. Amazon, they're a really good and very valued customer. They're one of our fastest growing customers. I really, for competitive reasons right now, don't want to talk about what's gonna happen on Prime Day.
At this time, I'd like to turn the floor back over to the company for any closing remarks.
All right. I'm conscious of time. I'm gonna wrap this up before the top of the hour. I want to thank everyone for dialing in and for your great questions. A shout-out to Omar for giving me a good reason to go back and talk to the marketing folks about that rundown on digital. Thanks very much, everyone, and have a great evening. Talk to you soon.
Thank you.
Fourth quarter.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.