Earnings Call: Q2 2019

Jul 9, 2019

Good day, ladies and gentlemen, and welcome to Levi Strauss and Company Second Quarter Earnings Conference Call for the period ending May 26, 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 July 15, 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 1 quarter on the company's website, levistroff.com. It is safe. 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 Berg, 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 leaveouts.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 Burks. Thank you, Hayat, and thanks everyone for joining us today. Against the difficult backdrop, we had a strong quarter with revenues of $1,300,000,000 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 newtons and brands in the 2nd 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 Q2, 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 BlueJean with customization events taking place around the world and limited edition product designed in partnership with San Francisco native, Perin 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. And in Europe, we launched User Voice, a new ad that celebrates the power of individuals in igniting change. I'll now walk you through our Q2 results in the context of our 3 where to play strategic choices, which are drive the profitable core, expand for more and become a leading world class omni channel retailer. 1st, on the profitable core business, which as a reminder, is comprised of men's bottoms, our top 10 wholesale customers and our top 5 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 Engineer gene performed well internationally. Pan doctors grew 1% globally. Our top 10 global wholesale accounts collectively grew 6%, and our top 5 mature markets collectively grew 6%, inclusive of our largest market, the U. S, which is up 1% while the other 4 markets grew 20% collectively. Our second strategy is to diversify the business by expanding for more in the tops, women's, underpenetrated 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 healthy sales of women's tops. Tots 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 the graphic tee per second. Our growth in tops this quarter went beyond tees, demonstrating our ongoing diversification in the category. And our signature and ends in brands collectively delivered 9% growth on top of the 60% growth in the Q2 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, but there's still a lot of heavy lifting to do. In our business in other emerging markets of India, Russia and Brazil, we're up double digits. The 3rd strategy is to become a leading world class omnichannel 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 is again very strong, up 25% for the quarter, with increased traffic in all three regions. And we continue to enhance our omni channel capabilities. We've begun to roll out our 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 2nd quarter and first half performance in greater detail. Harmit? Thanks, Chip, and welcome to everyone joining our call. My comments today will reference 2nd quarter comparisons on a year over year basis in U. S. Dollars unless I indicate otherwise. 2nd quarter revenue of $1,300,000,000 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 9 points of constant currency growth were as follows: by region, two points of growth came from the Americas, 5 points from Europe and 2 points from Asia. By channel, 4 points came from wholesale growth, 4 points from our company operated stores and 1 point from e commerce. And by category, 3 points came from growth in men's bottoms and the remaining 6 points came from women's and shops. 2nd quarter gross profit of $700,000,000 represents an increase of $30,000,000 despite $25,000,000 of unfavorable currency translation. Reported gross profit for the quarter grew 4%, slightly lagging revenue growth, as 2nd quarter gross margin of 53.3% declined 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. 2nd quarter SG and A expense of $638,000,000 was up 7% over prior year 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 $19,000,000 of favorable currency impact. Beyond the higher advertising spend, SG and A as a percent of revenues was flat to prior as high investment in distribution capacity and direct to consumer expansion were fully offset by leverage on our base costs, something we expect will continue as our revenues grow. 2nd quarter adjusted EBIT of $82,000,000 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 $69,000,000 was down 17% from last year's $83,000,000 reflecting lower net gains on our foreign exchange derivatives and a stronger U. S. Dollar. Adjusted diluted EPS for the Q2 of 2019 was 0 point 1 $7 Let me repeat, dollars 0.17 which is down 21% over prior year. The EPS decline was greater than adjusted net income decline due to the shares we issued in connection with our IPO. Note that adjusted EBITDA and adjusted net income are non GAAP measures that exclude the impact of changes in fair value of previously cashed settled stock based compensation awards as well as $29,000,000 in IPO related costs, inclusive of the 25,000,000 dollars underwriters 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. Now I'll share more detail on the 2nd quarter results of our 3 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 bankruptcy and the closures that some of our customers have experienced over the last year, as well as a decline in discounted sales to the off price channel, reflecting that we're increasing 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, but 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 the backdrop of geopolitical volatility, including Brexit, bankruptcies of a few wholesale customers in the UK and weakening economy, the region posted net revenue growth of 9% on a reported basis and 18% in constant currency. And this was in the back of 19% constant currency growth a year ago. Revenue growth this quarter was again broad based across general channels, markets and product categories. Wholesale grew 14% and 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 continues to perform with double digit growth in both tops and bottoms. The retail'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 Inweis moved bottom, which grew 10% over prior year. China's revenues grew again on strong performance of company operated stores and e commerce channels, and 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 and A leverage, partially offset by lower gross margin reflecting higher product costs. With 2 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 and A rate of 44.4 percent declined 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 $288,000,000 grew 8% on a reported basis and 16% on a constant currency basis. And 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 and A leverage. Our first half adjusted net income of $220,000,000 grew 32%, reflecting the $22,000,000 adjusted EBIT increase, as well as the fact that last year we reported a $38,000,000 tax charge on undistributed foreign earnings in connection with the U. S. Tax law change. Adjusted diluted EPS for the first half of twenty nineteen was $0.55 which is up 27% over prior year, again reflecting some increased dilution from first half adjusted net income growth due to the share we issued in connection with our IPO. On to balance sheet and cash flow. 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 2 quarters from 16% at year end and 11% at Q1, reflecting the delicate measures we have taken in recent quarters. Accordingly, our inventory is very heavy headed into the second half of the year. Total available liquidity at quarter end was more than $1,700,000 comprised of cash of $861,000,000 short term investments of 18,000,000 and $806,000,000 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 $82,000,000 down from $359,000,000 last year, and our leverage ratio declined to 1.4 compared to 1.5 a year ago. Cash from operations for the 1st 6 months of 2019 of $162,000,000 was $66,000,000 lower than the 1st 6 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 and the $25,000,000 underwriters 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 $39,000,000 for the 1st 6 months of 2019 represents a $42,000,000 decrease compared to the 1st 6 months of 2018. This is primarily due to the $66,000,000 decline in cash from operations I noted a moment ago, dollars 16,000,000 higher capital expenditure and our first half dividend payment of $55,000,000 which was $10,000,000 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 a 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 bill 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 gross margin and SG and 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. And 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 250,400 basis points to our revenues and adjusted EBIT growth rates respectively. Before turning to Q and 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. But 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. Questions. Your first question comes from Matthew Boss with JPMorgan. Congrats on a nice quarter, guys. Thanks, Rob. Thanks, Rob. So 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, and innovation has kind of been our lifeblood. And when we're successful innovating, it does drive our business results. And that's why and you've been there, that's why the very first investment we made while I became CEO was the Eureka Innovation Center right up the street to really send the signal about the importance of innovation. So it is in our lifeblood. Now I like to think about it in a couple of different buckets. There's kind of 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. So it is and 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. So 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. And over time, that is going to drive a fairly significant savings in production cost because we're finishing it with machine and set people, and 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, and that should ramp the full potential is about half of our total bottoms business. And so we should ramp from 25% to that full potential over the next 2 years or so, so through 2021. The other thing, we've already announced this, and 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. So they'll be able to go online and design their own jeans. And in a couple of days, it will arrive in their 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, and 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 Katya Walsh as our SVP of Strategy and AI. She's really a machine learning expert, Doctor. Katya Walsh, I should say. And if you think about opportunities for us for leverage statements 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, kind of on a global basis, how we sort online, but also down to literally down to the store level and how we optimize our assortments down to the store level. We've tested this already, and we've seen a pretty significant improvement in store level results. We optimize based on the consumer that's shopping in that store. There are also opportunities to get better at forecasting using machine learning. The computer can do it better than people can most of the time. And so we'll leverage that. And there the opportunities are really almost endless. I mean, we're testing using machine learning to help us predict, do a better job predicting future store locations based on changes in traffic patterns in markets like China. So we know there's 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. And unlike a lot of loyalty programs where they're point based, they give 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. So making it really something something only Levi's can do. So we've got lots of group renovation 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, that gives me confidence that innovation is going to continue to drive our momentum. Your next question comes from Paul Lejuez from CIBI. Paul Lejuez from Citi. Can you maybe talk about the growth that you're seeing in China business? Whether you saw more volatility over the quarter, just given the recent trade talks, curious how that's affected your business? And 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? So let's just cover the facts first. So China is about 3% of our business. It's about 20% of the apparel category globally. So 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 stores, 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. And 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. The growth is 3%. The strength that we saw in the businesses that we control just offset softness, continued softness in the franchise network. So 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. We went to 3 different locations. 1 group went to Hangzhou, 1 group went to Shanghai and 1 group went to Wuhan and spent a full day in the market and then we did our meeting in Hong Kong and reviewed our strategy for China. And I, as I said, feel very, 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 things 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. But we're also starting to focus on building the right kind of doors. So one of the reasons one of the groups from the Board of Directors went to move on 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. And it's going to provide a beacon for what is possible from Levi. So 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 owner update was up even more. And 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. So and I spend a lot of time there. My wife was born and raised in China, and our business is strong. But the equity of the brand is very, very strong. We've seen that. Now we just have to build on it. Your next question comes from Alex Walvis from Goldman Sachs. I wanted to dig a little bit into the U. S. Wholesale business. You talked about the growth rate there being kind of percent. You helped us out with some of the headwinds that you're seeing in the business. I wonder if you could help us to pass out between how much is the headwind is from bankruptcies and store closures versus existing doors and ongoing doors. Could you pass between off price, mass and department stores? And then 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 thirds was what I call a combination of bankruptcies, store closures and a softer environment. About a third was the fact that we reduced our discounted sales or incentive sales. And we feel good about that, thanks to having healthy inventory from that perspective. So if you 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. It's in the men's bottom business is a larger piece of the business. And we are focused on growing direct to consumer. Our 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. So 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 growing and doing that by focusing on customers outside the top or the big 4 or the big 5, 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. So 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 Syed with Evercore ISI. Congratulations. Another great quarter. I wanted to ask my question about digital marketing, marketing more generally. I 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. But 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. And 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 the 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 and more marketing spend, obviously speaking. Is that the right way to think about it? And maybe kind of any other kind of thoughts you have to expand on the topic? I'm sitting here, Omar, smiling like 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'd like to say the very best marketing going all the way back to the beginning of time is word-of-mouth. And word-of-mouth today is Instagram and Snapchat, and that's how consumers are learning about things. And shoppable social media is coming really, really fast and it already exists in a big way in China. And we've got to be all over that. So it does represent an upside opportunity. I should have mentioned it when I was talking about innovation, but we have a Levi cap coming real soon, too. So we'll see that before the end of the fiscal year as well. But it does represent a big opportunity. Television advertising still works, and we will continue to do TV advertising. But continuing to double down on digital and that's how to connect with the young consumer. And 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. So 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. I was hoping if 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 sell out trends or how your wholesale partners are managing inventory? Or is there just any commentary to explain what you're seeing and whether your sort of outlook has changed in that channel? So 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. But 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 tear back their store footprint has become more and more of an impact here of late. And our U. S. Wholesale business was down 2% since the Q1 in a while, but we've actually gone backwards. I think it's $7,000,000 in total dollars, but it's still going backwards. And customers are managing their inventory title, 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 own and and operated retail stores in the U. S. And point to growth there. So 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. And 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. So we've expanded more premium business. I believe our premium business was up 3% this quarter in U. S. Wholesale. So that's good. That's progress. It's not enough to offset the declines in some of the bigger customers. But it's going to continue to be challenging. As customers close doors, they're closing from the bottom of their lifts going up. And they're starting to cut into bigger doors that represent bigger business for us. And 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 are we've got strategies in place, and we want to kind of mitigate and offset the impact of door closures and bankruptcies by expanding our footprint with other customers, testing innovative things with customers. So we've been testing a concession model with Macy's, for example, in 6 stores. That looks very, very promising, potential to expand that. We've been testing Levi's and Target. That works promising the potential to expand that. These can all help offset softness in some of the other more challenged wholesale customers. But it's going to continue to be a tough slog. There's no question about it. When you think about it, U. S. Wholesalers, about onethree of this company's total business. So we've got to figure out how we mitigate the risk of the headwinds, which we know are inevitable. The only thing I'd add, Heather, you've seen, The only thing I'd add, Heather, you've seen the diversification of the business happen over time. So the fact that we can grow at the pace we're growing despite the U. S. Wholesale declining 2%, I think speaks for the broad based and the 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. And we're doing that in a way that margins are over time either flat or treated, not diluted. So I think that's the more and more piece of how you think about our story. Your next question comes from Bob Drbul with Guggenheim. I guess, with Armit, could you talk a little bit more around gross margin performance and maybe the buckets positive or negative? And 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? Yes, 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. So excluding that gross margins were 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 margin 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 some end products. So our LGA or Ziva's engineered gene 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. And so 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 the second half ex currency, I would say about 50 to 60 basis points increase second half to second half, second half twenty nineteen to second half twenty eighteen. And the prime drivers of that is 4 basic things. We think the impact of currency would be less, but I've talked about constant margins. So the constant margin is less incentive, sales in the second half. We have taken pricing. We've taken pricing in Europe. We've taken pricing in Asia. We've taken some pricing in the U. S. And continued growth of our direct to consumer business, especially as wholesale is under pressure. So 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. Okay, great. Thank you, Harmit. That was a really helpful rundown on gross margin. I guess, I just wanted to follow-up on it. So if you think about sort of your expectations 6 months ago, for example, on gross on the way gross margin would come out, did you I guess, how did the 2nd quarter gross margin differ from perhaps what you might have expected? Largely currencies, I would say. Currencies and the impact of the euro was a lot more dramatic, both in quarter 1 and quarter 2. And as you know, the Europe started weakening in the second half of last year. So 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 largely in our products, as I mentioned, Levi's engineered gene as well as we have broadened our products in the tops category. So we're taking pricing. And as we've said during the roadshow and we're reinforcing it, we think we have pricing opportunities, whether as we roll on FLX and as we are able to put in more investment in our products and obviously price for it. So 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? And Harmit, when you just talked about taking price, are it on is it on those categories also? And how much of a price increase would you take? Thank you. Yes. So taking pricing on some of our value brands is difficult because it's pretty competitive environment. So we spend the time ensuring our products across the value brands and Signature, Davidson are relevant. And if you have the opportunity to raise 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 expanded distribution in the U. S. And we're now expanding distribution of these brands in some of the emerging markets. So we launched Tenensin across wholesale channel and a value retailer in India. We have taken we expanded Tenensin and Signature in Mexico and we've taken we're testing Signature in China. So 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 wet tap. And your final question comes from Hal Holden with Barclays. Hey, thanks for taking the call. Chip, last year you guys had a very active presence on Amazon Prime Day. And I was wondering if this year, given the lower flow through of sales to the discount channel, we see a change in that? Or is that just a separate discussion? Short answer is separate discussion. Amazon is a good they're really good and very valued customer. They're one of our fastest growing customers. But I really, for competitive reasons right now, don't want to talk about what's going to 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, and I'm going to wrap this up before the top of the hour. And I want thank everyone for dialing in and for your great questions. And a shout out to Omar for giving me a good reason to go back and talk to the marketing folks about that one down on digital. So thanks very much, everyone, and have a great evening. Talk to you soon. Thank you. Good quarter. Thank you. This concludes today's conference call. Please disconnect your lines at this time.