Good day, ladies and gentlemen. Welcome to the Levi Strauss & Co. first quarter earnings conference call for the period ending in February 25, 2018. All parties will be in 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 April 16th, 2018, by calling 1-855-859-2060 in the U.S. and Canada, and 1-404-537-3406 for all other locations. Please use conference ID 8997477. This conference call is also being broadcast over the internet. A replay of the webcast will be accessible for one month on the company's website, levistrauss.com.
I would now like to turn the call over to Chris Ogle, Vice President, Treasurer, and Investor Relations at Levi Strauss & Co..
Good afternoon, everyone. 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 strategy 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 statements, 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 also available on our website. Now I'll turn the call over to Chip Bergh.
Thanks, Chris. Good afternoon, everyone, and thank you for joining us today. We had a great start to the year. Our strategies are clearly working as we again delivered balanced and profitable growth across our global business. The momentum we saw in the second half of last year, especially in the fourth quarter, has not only continued, it has accelerated. In Q1, we reported 22% revenue growth, 16% in constant currency, while adjusted EBIT increased 59%. The incremental investments we made in marketing, direct-to-consumer expansion, and our more diversified portfolio are paying off with growth across nearly every market, channel and category. We knew that the quarter would be a good one given the strong holiday, it turned out to be stronger than even we expected.
This momentum is giving us the opportunity to invest more in our business and brands so that we can continue to grow and win in the future. Now I'll touch on some of the key highlights and opportunities from the quarter, all in constant currency in the context of our four strategic choices. As a reminder, our strategies are to grow our profitable core business, expand for more, become a leading omni-channel retailer, and achieve operational excellence. Within our profitable core business, the Levi's brand had a great quarter with 17% growth. Once again, the brand grew in every channel and in all three regions. The Levi's men's bottoms business, which really is our core, grew 5%, led by fits such as our 505, the 502 regular taper, and the 541 athletic fit.
Currently, the Levi's men's bottoms business is number one in market share in eight of our top 10 global markets. The moment we're experiencing reflects our efforts to build brand equity and stay at the center of culture. For example, our collaboration in January with Nike for the Levi's and Air Jordan collection created a lot of brand heat, immediately selling out online with fans lining up outside of our stores two days in advance of the launch of the product. Collaborations such as these are a small part of the business, but they generate energy and excitement for the brand overall. Our top five mature global markets, the U.S., France, Germany, Mexico, and the U.K., collectively grew 13%. Our global wholesale business grew 15%, primarily driven by our key customers. We're encouraged by the progress we're making on Dockers.
While the brand declined slightly, we are seeing a strong consumer response to our Smart 360 Flex Khaki and Easy Khaki. This quarter, we also debuted the second installment of the Always On marketing campaign for spring 2018. In the second half of this year, we'll continue transitioning to new products. Our second strategic choice, to expand for more and create a more balanced portfolio, continued to take shape this quarter. Our total Levi's women's business grew 28% across all regions and channels. The majority of the quarter's growth was driven by the 700 Series jeans collection and the 311 Shaping Series, with skinny fits and high rise continuing to be our best sellers. Globally, our total tops business grew 38%. This is a business that we keep expanding as we strengthen Levi's as a lifestyle brand. Graphic logos remain strong, including Batwing tees, hoodies, and sweatshirts.
In Europe this quarter, tops growth outpaced bottoms in both men's and women's. While we're pleased with our success in tops, we still have significant upside opportunity in this category. Our two value brands, Signature by Levi Strauss & Co. and dENiZEN, continued their momentum, collectively growing more than 30%. Women's overtook men's in the first quarter, becoming the largest business for each of these brands. Beyond the core markets, our international business collectively grew in the mid-teens. China represents the biggest opportunity in this group. We've been focused on turning our business in China around, we're starting to see some traction. While revenues declined as planned in the franchise channel, revenues from our company-operated stores and e-commerce grew in the quarter. It will take time, but we are optimistic that the strategies we're implementing will pay off over the longer term.
Our third strategic choice, to become a leading omni-channel retailer, resulted in 18% growth in our direct-to-consumer business this quarter. We continue to see strong performance in our retail stores, driven by optimized assortments, strengthened in-stocks, and improved service. We're also seeing results from the investments we made last year, both in new stores such as Osaka, as well as remodels of existing store locations such as Soho, which has had impressive growth since it relaunched in Q4. Last month, we opened our first flagship store in Latin America. The store is located in Mexico City in the heart of the historic district on Madero Street, it represents the best of the brand in terms of location, store design, assortment, and experience. We also delivered strong growth online this quarter, including expanding our e-commerce presence with a new website launch in India.
We continue to focus on our fourth strategic choice to achieve operational excellence around the world and drive higher productivity. At the end of February, we announced Project FLX, a new operating model that will change the way jeans are designed, made, and sold. FLX uses a combination of proprietary digital design and manufacturing capabilities that will give us the ultimate balance of agility and sustainability while upholding the Levi's standards of craftsmanship, quality, and authenticity. With that, I'll turn it over to Harmit to walk you through the first quarter financial results. Harmit?
Thank you, Chip. Welcome to everyone joining our call. My comments today will reference first quarter comparisons on a year-over-year basis in U.S. dollars, unless I indicate otherwise. First quarter revenue of $1.3 billion grew 22% on a reported basis and 16% in constant currency. Wholesale revenue grew 21% on a reported basis, primarily reflecting strong results in Europe and the Americas. Direct-to-consumer revenue grew 24% on a reported basis. These results were driven by performance of existing stores, as well as ongoing expansion of the store network internationally and e-commerce, which grew 29% on a reported basis. Gross profit dollars for the quarter grew 31%, and gross margin of 55% was up 370 basis points, driven by direct-to-consumer and international growth, lower product sourcing costs, and a favorable transactional currency impact of about 100 basis points, primarily from Europe.
First quarter SG&A expense of $564 million was up 24% over prior year. The dollar increase of $108 million was comprised primarily of higher selling costs related to growth and expansion of our direct-to-consumer channels, our planned incremental advertising investments, higher incentive compensation expenses reflecting the appreciation of the company's stock price, and higher annual bonus accruals, and $18 million in unfavorable currency translation. Importantly, however, despite the dollar increase, SG&A, as a percentage of revenue, increased only 60 basis points compared to last year. Excluding the nearly 100 basis points from higher advertising investments, our base business levered, including direct-to-consumer. First quarter adjusted EBIT of $175 million was up from $110 million last year, as strong revenue and gross margins drove 59% adjusted EBIT growth. Overall, folks, a great quarter for the company.
Despite our higher pre-tax earnings, we recorded a $19 million net loss for the quarter due to a non-cash tax charge of $136 million related to the new tax law in the United States. The $136 million we recorded is provisional and primarily represents our best estimate of two things: The write-down of net deferred tax assets that we now expect to realize at lower tax rates, and a one-time tax on undistributed foreign earnings, which you may have heard referred to as the toll charge. The $136 million provisional charge inflated our tax rate for the quarter. Without it, our tax rate would have been around 22%. Excluding the provisional tax charge, adjusted net income was $117 million, nearly double last year's $60 million.
I'll share more detail on the first quarter results of each of our three regions, where revenues and profits grew on both a reported and constant currency basis. In the Americas, revenue grew 13% in constant currency and 14% on a reported basis, reflecting strong growth in wholesale and direct-to-consumer across the region. This is the best quarter the Americas region has delivered in recent history. Wholesale growth was primarily driven by our top accounts and included Levi's men's and a very strong growth in women's, as well as higher Signature and dENiZEN revenues. Direct-to-consumer was driven by the performance and expansion of our company-operated retail network and higher e-commerce revenue. Our largest market, the U.S., was up 11%. Mexico and Canada continue to perform with revenue in each up double digits this quarter, driven by growth in all channels and nearly all categories.
The full region's operating income grew 23% on a reported basis as the higher revenues and higher gross margin were partially offset by increased selling and advertising expenses this quarter. Europe had another exceptional quarter, with net revenue up 30% in constant currency and up 46% on a reported basis. The business continues to go from strength to strength, driven by the marketing and inventory investments we have made. Revenue growth was broad-based across all channels, markets, product, and consumer categories. Wholesale grew 35%, reflecting the strength of the brand and the expanded product assortment across our customer base. Direct-to-consumer was up 25%, driven by performance from existing stores, reflecting higher traffic and conversion rates, in addition to new company-operated stores opened over the last 12 months. Our e-commerce channel also grew mid double digits.
The diversification of our portfolio in Europe continues to yield results with growth of 43% in women's, while our Tops business nearly doubled. The region's operating income grew 79% on a reported basis, reflecting higher gross margins and SG&A leverage. In Asia, net revenues were up 5% in constant currency and 9% on a reported basis. Our wholesale brick and mortar and e-commerce channels each grew double digits. This growth was partially offset by a planned decline in the franchise channel in China due to the strategic closure of nearly a third of our franchise doors in the past year, primarily smaller shop in shops in the departmental store channel. Encouragingly, sales from the remaining franchise doors in China grew year-over-year.
Adjusted EBIT for the full region grew 13% on a reported basis as the higher revenues and higher gross margin were partially offset by increased selling expenses to support retail expansion. Turning to the balance sheet and cash flows. We made progress in optimizing inventory levels globally. Ending inventory balances were higher in Europe to support the region's exceptional growth, while inventories in the Americas and Asia were in line with a year ago. Free cash flow for the first three months of 2018 was -$35 million, a decline of $33 million compared to the first three months of 2017. A $17 million increase in cash from operations was offset by realized losses on our currency hedging contracts, repurchases of common stock in connection with our equity incentives program, and a higher dividend payment.
CapEx for the first quarter was $31 million as compared to $25 million a year ago. On a gross basis, we opened 22 company-operated stores in the first quarter and remain on track for our full year target of nearly 100 stores. Total available liquidity at quarter end was approximately $1.3 billion, comprised of cash of $590 million and $745 million available under our credit facility. Net debt at the end of the first quarter was $497 million, down from $672 million last year, and our leverage declined to 1.6 compared to 1.8 a year ago. Given the strong momentum with which we've begun this year, we are updating some of the full-year guidance we provided last quarter. We are raising full-year constant currency revenue growth guidance to a range of 6%-8%.
While we are off to a great start, we are tempering our full-year outlook due to the uncertainty in the macro environment, as well as the fact that in the second half of this year, we'll be comping the strong growth rates we saw in the third and the fourth quarter of 2017. We are also raising our full-year gross margin guidance. Now express gross margins will expand by approximately 150 basis points. We now expect full-year SG&A as a percentage of revenues to increase by approximately 120 basis points, of which about half reflects increased advertising, with the balance largely driven by direct-to-consumer and technology investments. Accordingly, we expect full-year adjusted EBIT margin to expand in the range of approximately 30 basis points.
Given the continued weakening of the US dollar based on spot rates at the end of the first quarter, we expect that currencies will favorably impact full-year reported revenues and adjusted EBIT growth rates in the range of 300 basis points and 900 basis points respectively, and will favorably impact full-year adjusted EBIT margin in the range of 50 basis points. Excluding the $136 million impact from the change in tax law, we expect our full-year tax rate in 2018 to be about 20%. Specifically, in regard to the second quarter, please note that we expect adjusted EBIT will be pressured by advertising expenses, both due to the increase we are planning, as well as our strategy to smooth our quarterly investments as compared to 2017. We are holding to the other expectations we shared with you last quarter. With that, we will take your questions.
Thank you. The floor is now open for questions. If you have a question, please press star, then the number 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound sign. Because of difficulty hearing questions on a speakerphone or headset, we ask that you please use your handset. Your first question comes from the line of William Reuter with Bank of America Merrill Lynch.
Good afternoon, guys.
Hey, Bill.
I'm sorry if I missed this, you were talking about increasing your investments in advertising and promotions. I could tell that, I couldn't tell whether you were planning to increase them as a percentage of sales this year, or if that was just an increase in absolute dollars. What was that comment that you guys made?
Yeah. What we had said, Bill, earlier when we talked about guidance for the year, we talked about taking the advertising expense as a percentage of revenue up between 50 and 60 basis points. We've talked about a 60 basis points increase on a full-year basis. As a percentage of sales for quarter one, advertising as a percentage of revenue is up 100 basis points, that is a combination of better smoothing of the advertising spend through the year, as well as increasing investments in media during the year.
Okay
Just to clarify, I think you got it's a 50 to 60 basis point over the actuals from last year. That's what we guided at the beginning of this fiscal year. Now that we're taking our revenue guidance up, we're holding our A&P investment as a percentage of revenue at that 50 to 60 basis point guide versus last year's actuals.
Okay. Given the strong performance of the business and balance sheet, which is in, obviously, a very healthy position, has there been any increased thoughts about M&A at this point? I guess it would seem like you guys are going to generate a whole lot of free cash flow and seemingly are able to do good things for the brands that you have now. How about adding another one?
Yeah. Let me talk about capital deployment, or cash deployment a little bit. Relative to last year, Bill, as the business has gone from strength to strength and our performance has improved, we're spending a little over $100 million across a couple of things. We're upping our capital spend year-over-year by $40 million. As you know, we're sticking with that same guidance, and that's largely towards technology, e-commerce, as well as opening stores, primarily flagships. We're relocating a flagship in Times Square towards the end of this year. We opened a flagship in Mexico that Chip talked about. We're also upped our dividends, so returning more, in terms of dollars, more capital to our shareholders, and we have also increased our funding towards the pension plan. We intrinsically believe that there is a lot of growth left in the brands we currently have.
We under-penetrated in the tops category. We believe that we have a lot of room to grow in the women's category, for example. Our intrinsic health of the business continues strong and there is room to grow the business organically. Having said that, as we've said in the past, given the fact that we have access to a lot of liquidity, as we look at potential M&A targets, it probably needs to fit within our strategic filter as well as our financial filter. We maintain the discipline, we will look at both the filters, and really it's about growing, further accelerating our growth in tops, further accelerating our growth in women's, as well as in categories like outerwear.
Just lastly, you're relatively close to investment-grade ratings. Your credit metrics keep looking better. Have you had any recent conversations with the rating agencies on your ratings that you can share with us? That's it. Thank you.
Yeah. We have ongoing conversations with them. The good news is that our business is more diversified today than it was five, six years ago because they look at diversification beside pure leverage. The diversification in our case has come geographically. For example, international is now bigger than the U.S. It's come in our product categories. We're growing tops and women's, as well as the channel mix. Our direct-to-consumer business now is about a third of the mix. Conversations continue, it's less about reducing debt. If we ever get even financially to ratios or metrics that make us investment-grade, it'll largely be driven by earnings. Having said all that, financial policy, as you know, Bill, is important to the rating agencies. As we think about expanding this business, both organically as well as inorganically, that'll come into play.
Great. Thank you.
The good news for us is we have access to capital. Our capital structure allows for that. The last two rounds of financing we did, folks like yourself tell us the interest rates that we actually were able to place our bonds were very close to an investment-grade company.
Makes sense. Thank you.
Thanks, Bill.
Thanks, Bill.
Your next question comes from the line of Grant Jordan with Wells Fargo.
Hey, good morning. Good afternoon. This is actually David Eller on for Grant. On the last call, you talked about both December and January being very good for your results. Obviously, that played out in this quarter. Could you give us a little idea of maybe how results finished the quarter in February and maybe how they started off in March for Q2?
David, good try. We don't obviously talk month to month, and we don't necessarily guide quarterly. What I would say is the quarter was strong. It started with the holiday season, which, as we've said earlier, is a combination of November and December for us. The fact that we had a good quarter speaks for itself. January is obviously a slightly softer month than December and Jan, just that's the nature of the market. You have other parts of the world, Asia, for example, where Chinese New is a big play. I think it's difficult to break it up by month from that perspective. The fact that we're raising our full-year guidance is demonstrative of how we feel about the business.
The one thing I will tell you, we don't expect the mid-teen constant currency growth rates to continue for the rest of the year. It's really driven by a couple of factors. One is, we are going to be lapping a stronger second half. Last year, our first half grew at a slower pace than the second half. It still grew at a modest 5% or 6%, so I can't call it weaker, but it still grew at a slower pace. That's one reason why we're taking our guidance up, but it's in the range of 6% to 8% as against anything different. The second is just the environment. There are a few balls in the air, whether it's trade policy, it's tariffs, et cetera. We just have to be fiscally prudent as we think about the future and guide the future.
Great. You mentioned your new Project FLX. I would assume that is the same technology that was referenced in a Wall Street Journal article about a month ago. Could you talk about what sort of investments will be required for that program, then over what period of time you might make those investments and if there's any other firms or competitors out there that are using similar technology?
The investments are largely in the form of lasers, which primarily our vendors are in the process of investing, as well as some digital technology that we are driving because we are pioneering some of that ourselves.
In terms of the, we've started the rollout of this product is now hitting the floors, but the real rollout is going to accelerate over the next couple of years, and we expect that to be available globally around 2020. I think, in terms of financial implications, it's too early to tell, David, but it's probably going to imply better margins. It's probably going to be lower inventory longer term, all of which we'll quantify over time. I think primarily the advantages are it drives higher agility, it helps digitize how we design, make, and sell our products. There are obvious advantages from a sustainability perspective. I think it's broader than just a financial opportunity.
I'll pile on just briefly. First of all, to answer your question directly, the Wall Street Journal article that you referred to, yes, that does refer to Project FLX. The way I talk about it is this is the fourth industrial revolution meets the apparel industry. It is the digitization of apparel design and manufacturing. I want to underscore just a couple of things. I mean, lasers have been used for 15 years in this industry. What's new about that? What's new about it is we've created a lot of proprietary technology that we've owned. We've actually had one patent already approved. We've got more in motion. There's a lot of true proprietary invention that we've brought to the party here, number one.
Number two, the big headline idea on this over time is today's apparel industry kind of operates on a sell what you make basis. We make lots of product. We make it on the other side of the world. We ship it over here, then it's on us to figure out how to go sell it. This is going to give us the potential to be much more agile, likely much closer to market, where we'll be able to make what we sell. We can be responsive to what's happening in the marketplace and turn orders around really quickly. It is, I think, potentially a huge disruption, we'll see it roll out, as Harmit said, over the next couple of years.
We've already been selling product that's been made with this technology for the last almost 12 months, just doing it blind to confirm that there are no consumer issues with it, we feel really confident about that. It's a big idea, we'll see it expand over time, we'll have more updates on the financial impact of it. It should be good.
Great. Then for my last question, you talked about China and kind of the closure of the franchise stores for the channel. Could you just give us a reminder, just on the overall state of the market there, kind of where your brand stands compared to competitors and the future outlook?
Levi's is the number 1 brand based on the market share data that we've got in China. One of our key competitors, also based here in the U.S., is number 2. We had about 650 doors in China, and when we say doors, that also includes the shop-in-shop format, which most of you are familiar with, but it's basically a very small pad in a department store. Our business model is largely a franchise model in China, and over the past couple of years, we've evolved that model to fewer franchisees, more capable franchisees. As we've gotten into it, a number of the doors that we were operating or that our franchise partners were operating were not profitable. Last year, we made the decision to close those unprofitable doors. We reduced our door count by about 150 doors in China last year.
Most of them being the smaller shop-in-shops in the department store channel. The department store channel, I should mention, and that whole shop-in-shop concept, is a declining segment of the Chinese market. I guess the last thing I would say is our brand, the brand health in China is very strong. We're the leading brand today, number 1. Number 2 is when we take a look at our own business in owned and operated, we're growing. In the franchise stores, as we referred to in the script, in the franchise stores that are still open today, they're comping positively. This is a little bit of, I call it a cleanup, and it's been a cleanup, and it's been heavy lifting. We're committed to the long-term success of our business in China. It's still less than 5% of our total company.
When you look at the potential of China longer term, we have to be successful there. That should be a very big business over the next couple of years.
Great. Thanks for taking the questions.
You bet.
Thanks, David.
Once again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star one. Your next question comes from the line of Hale Holden with Barclays.
Hello. Thank you for taking the question. I just had two.
Yeah.
You guys mentioned twice, both in the script and in response to another question, tempering the outlook or not pulling forward the full beat in the first quarter.
Due to some wariness about the macro environment. I was wondering if you were going to rank them. Is there one issue that you're more particularly worried about than others?
We're looking at each other here. The biggest uncertainty I think we're facing, there are really two, and I don't know if I want to rank them, but one is the uncertainty around trade and tariffs. That could have significant short-term impact. The other is, while the wholesale business here in the U.S., which, reminder, is still about 1/3 of our total company's business. While we've seen some room to be encouraged, right? Because they had a good holiday, and things have been pretty robust over the last quarter. There are still a couple of customers that are weak financially, and there are still some macro risks, I would say, in that channel here in the U.S. Our business was very strong in the first quarter in U.S. wholesale. I hope it continues, but there's risk that it might not.
I would say those are probably the two biggest macro headwinds that gave us cause to just temper the outlook a little bit. The last thing is, as Harmit said earlier, our second half last year was pretty strong, and the law of big numbers starts to come into play as we begin to lap double-digit growth in the fourth quarter last year.
The only thing I'd say, Hale, is 6%-8% is pretty damn good.
Yeah. It's kind of
Just as a reminder, it was not very long ago this company was growing in the low single-digit growth. I think we've demonstrated last year, and we're sticking with the same this year, which is we're moving towards mid to high single-digit growth company. I think the category is not growing at this pace at all, and that speaks a lot to what's been happening over the last many years and how we've been investing to diversify both geographically as well as across product categories.
Got it. You hit my second question there, I do feel bad about asking the goose laying four golden eggs to lay a fifth one. The category is not growing as fast as you're growing, either in the geographies that you're growing or just broadly globally in jeans wear. I was wondering if you were seeing any competitive responses, or if you thought this was a sustainable flywheel on a go-forward basis.
We think we've got the flywheel going. The one thing about this industry is it is pretty fragmented, right? You can go country by country, and in some countries we've got completely different sets of competitors, some of whom are local or regional in nature. My view of the world is there are still a lot of share donors out there, and we do have the potential, given the strength of the brand today, to grow ahead of market growth and build share in doing that. We've been doing it most notably on the women's business since we relaunched that about 11 quarters ago. We didn't talk about it explicitly, but we've had 11 straight quarters of growth on our women's business, and five of those quarters were double digits. It was less than an $800 million business. It's now over a billion-dollar business.
There are a lot of share donors out there still to be had.
Hale, the thing to consider, as you all know, there's major disruption happening in the retail space. I think what's going to separate the winners and losers is first, folks having great brands like ours. More importantly, as we think about growing the business, investing for the long term. We're investing in direct-to-consumer, we've invested in marketing, we're diversifying our product categories. We're growing our e-commerce platform as well as investing in digitizing a whole bunch of things. That's what's going to probably need to happen. While SG&A, for example, has increased, it's largely been driven by us investing for the long term and allows us to transform the company that once was five years ago to the company that we want to be 10 years from now.
Great. Thank you very much for the time.
All right, Hale.
Thanks.
Thanks.
Your next question comes from line of Giannelli with Citi.
Hi, thanks for taking the question. I just had a few follow-ups. First one on the gross margin line. I appreciate, I guess, the level of conservatism on the top line for the balance of the year. When we look at the margin expansion in 1Q, then the raise to 150 basis points, is there some level, I guess, of conservatism on the gross margin line there as well? Could we expect some of these lower product sourcing costs and the expansion to continue at the same rate?
Yes. I don't expect the same rate of expansion and gross margin to continue for the rest of the year. If you break out what's driven the expansion in gross margins, two-third of it was growth in our direct-to-consumer business, as well as product sourcing opportunities. I'd say about 100 basis points was driven by favorable FX. The U.S. dollar started weakening towards the second half of last year. We think that pace of growth in margin thanks to FX slows down, and that's why we have kind of narrowed our full-year expectations on gross margin. Now, we are where we can given the strength that we're seeing in our brands. We are reducing the level of promotional activity and markdowns, especially as our products become a lot more relevant and the brand takes off the way it has been.
You probably see a bit of that. If that leads to higher margins, that's where you will see the upside longer term.
That's helpful. Thank you. I just had one more. I think, Chip, in your prepared comments, you said that the first quarter surprised you guys relative to your expectations. I guess, was there any particular area, any particular region, wholesale versus retail, any wholesale partners in particular that were really the driver of maybe that surprise or what exceeded versus your original expectations?
I've said for a long time that if the U.S. business is healthy, it takes care of a lot of things given the size of our U.S. business.
Our U.S. business grew double digit, and a lot of that was driven by the strength of wholesale. That, to me anyway, is the standout surprise in a pleasant way. We put Roy Bagattini, who's the president of the Americas region, and his team have put a lot of emphasis in making sure that we've got our strategies right with each key customer, that our plans are strong, and I think we're just doing a much better job now executing in the U.S. The momentum continued and accelerated in Europe and in direct-to-consumer. There were pleasant surprises kind of around the pitch all the way. The big standout, I think, would be the overall strength of our business in the U.S., predominantly in wholesale, but also in direct-to-consumer.
Okay, great. Thanks so much.
Sure.
At this time, I'd like to turn the floor back over to the company for any closing remarks.
Okay. I guess that's me. Thank you all very much for calling in, and we will talk to you at the end of the second quarter. Thanks and goodbye.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.