Hello, everybody. Thank you for joining us today for BofA's MidCap Conference. We are delighted to be joined by Harmit Singh, Executive Vice President and CFO of Levi Strauss and Company. Harmit has over 30 years of experience with consumer brands and is approaching his 10th year with Levi's. With that, Harmit, thanks again for joining. If it's okay with you, I can jump right into our prepared Q&A.
Thanks, Chris, for having us, and I appreciate everybody joining in. Yeah, I think that's the best way, given our earnings release a couple of weeks ago. Let's get straight into Q&A .
All right, great. Back in June, you provided an updated long-term outlook at your Investor Day, which included 6%-8% revenue growth, approaching a 15% operating margin and then low double-digit annual shareholder return. There's a lot to unpack here, but it would be great if you could walk us through some of the key drivers of reaching these goals.
Sure. Chris, you know, when there are so many clouds on the horizon, you know, a few folks said, "Okay, why are you doing an Investor Day? Why are you know, talking about longer term growth targets?" We felt because we run this company for the long term, and we did the IPO, we talked about the fact that, you know, as a company, we'll guide for the year, and then when we're ready, we'll talk longer term targets. During the trough of the crisis, I remember in April 2020, you know, when all our stores were shut, we had a plan that talked about how you manage through the crisis, which is all about cash preservation and protecting profits, but more importantly, how do you emerge stronger?
The plan on the emerge stronger plan, which was something we called Bonsai One, we delivered that in 2021, you know, which was our strongest year on record in a couple of decades financially. The company was emerging much stronger. Once the ink of that was dry, we said, "Okay, let's think about the next five years." We came out with something called Bonsai Two and discussed it internally with the board and said, "Okay, let's make it public for Investor Day," because we never had one as a public company. That's why we did the Investor Day in June. The three underpinnings of the plan were largely accelerating growth from 4%-6%- 6%-8%.
It was largely driven by the fact that even pre-pandemic, we were running, you know, north of 6%. Dockers was a drag, and we didn't have Beyond Yoga. You know, it was clearly that we could accelerate growth, especially on the back of the casualization tailwinds, which emerged post the pandemic, and the fact that as a brand, we're connecting, you know, faster and deeper with the younger consumer, both in the U.S. and around the world. That was really the core drivers of accelerating growth. On EBIT margins, as you know, when we did the IPO, we talked about getting to 12%+. We hadn't given a timeline. We didn't know we had a growth equation that said EBIT margins would grow 20-30 basis points a year. During the pandemic, we tightened costs.
We were able to grow gross margins, and structurally position the company. As a result, you know, our EBIT margins are now north of 12%. You know, our last guidance talked about EBIT margins being in the mid-12s this year. The question is, if you're accelerating growth and structurally gross margins can improve year-over-year, and you're able to leverage SG&A, you know, can you get to 15%? Our goal and aim is we believe we can. The last piece of our growth algorithm was clarity on capital allocation, and returning capital to shareholders. You know, we are a dividend-paying company. We continue to grow dividends, but we don't have a dividend policy or didn't have a dividend policy.
We thought giving clarity on guidelines on how we're gonna return capital was important. That's why the 55%-65% of free cash flow that we believe we can return back to the shareholders over time I think was provided, and the board had approved a $750 million share repurchase program. That was, you know, the underpinnings of the Analyst Day. Structurally, you know, we still think we're underpenetrated in tops and women's and international and direct-to-consumer. You know, most of them are gross margin accretive, and that's why it was important to give color around it.
Got it. That was a really good overview, I think, to start our conversation. Maybe pivoting to this year, right? Last month, when you reported 2Q results, you maintained your full year EPS outlook. Can you just discuss why you remain confident in Levi's ability to navigate this challenging environment over the medium term? What are you keeping an eye on the most in terms of just gauging the overall health of the consumer?
Yeah. You know, we've had two great quarters. You know, our first half, you know, has beaten both internal and external expectations. We start the year off really well. The consumer, you know, as. You know, when we printed, and even what we're seeing, generally strong. You know, the tailwinds of casualization. As people return either back to work, they wanna dress more comfortably. Jeans are becoming more acceptable in the workplace. I'm sure folks on the call will relate to it. You know, so I think. You know, we continue to focus on costs and everything else. That's what gave us the confidence. It's not that there are no headwinds. We did say in our earnings that it.
The fact that our operations in Russia are temporarily closed, China lockdowns, you know, foreign exchange, because, you know, a large piece of our business is overseas and U.S. dollar is stronger. We were able to absorb that in quarter two. We built that, you know, expectation in the second half of the year. You know, that's what the guidance is a range, right? You know, I think those are the reasons why we kind of affirm guidance. What are the things we're watching out for? We are watching out for demand from retailers where, you know, we did signal, and I think we were the first to signal the first signs of weakness in the lower-end consumer.
Because we have a small, not a large, percentage of our sales that we sell to Walmart and Target, and both of them, you know, have recently issued profit warnings. We did sense, you know, sales softness on the back of a real strong quarter two last year, you know, but still some sales softness, and we did signal that. I think the things that we are watching out for, obviously, you know, what's happening with inflation, what's happening to demand. We look at prebook, we look at orders from our customers, you know, what's happening with traffic. As a company, as we demonstrated during the pandemic, you know, we are agile. You know, we can tighten costs, we can tighten inventory.
A large piece of our inventory is core. You know, you can sell through multiple seasons, so we don't necessarily have to mark down. That's one of the advantages of the brand. Those are the things that, you know, we're, you know, watching out. Interest rates, you know, all our debt is fixed, so that won't impact us. You know, it's largely consumer demand and, you know, how do we manage through, you know, the environment, both in the U.S. and outside.
Got it. That was very helpful, and I think we'll unpack a lot of that later in this discussion. Let's shift to your goal of achieving direct-to-consumer penetration over 50%. I think you outlined 55% at your most recent Investor Day. I think currently you're a little below 404. Can you talk to us about how increasing your own digital penetration plays into this outlook? Then what are some of the key initiatives you're taking to improve your digital business?
Yeah, sure. The 55%, you know, growing from 40, and as a company that was primarily wholesale. When I joined the company, it was primarily wholesale, primarily U.S., and primarily men's bottoms. The company today is primarily international. You know, we have changed the business mix. Our tops business continues to grow and, you know, has been growing double-digit, you know, pre-pandemic and in the last quarter. And our direct-to-consumer business is, you know, has been growing low double-digit. Then our growth algorithm we talked about in the mid-teens. What gives us confidence? We'll talk about stores, and the fact that, you know, a retailer, unlike some of the other retailers, we've been opening doors, and I can talk more about it.
Let's talk about your digital question. Our own e-commerce business is about 8% of our total revenues. It's about 50% more than pre-pandemic. It's profitable. Pre-pandemic it was unprofitable because we continued to invest. We're making a lot of focus on it. We, you know, during Analyst Day, we said that a business that's about $500 million in size, when the consumer is engaging with brands more digitally, we think can triple over the next five years. The reason we have to triple or grow that business is, it's the highest gross margin business, it's how the consumer is shopping today, and, you know, we're under-penetrated. Plus, EBIT margins are dilutive to the overall company. It's a must-do.
What we are looking at doing is a couple of things. You know, we're rolling the app out. You know, we have about the app is now rolled out in 10 countries. You know, we have a plan to double it globally. That's one. The second is we have a loyalty program that we initiated during the pandemic. Through that centralized loyalty program, about $9 million loyal consumers globally. It's a little more than that because there are countries that have their own loyalty program. So for a brand like ours, we think that number should be a lot bigger.
We've just announced, you know, the desire to hire a chief digital officer, someone who wakes up every morning, working on growing e-commerce, and we're actively recruiting for it, and hopefully should be able to announce a hire fairly quickly. As well as really focused on, you know, having a seamless consumer experience between buying online and shopping in store. You know, we rolled out buy online, pick up in store. We've got ship from store. We've got. We haven't scaled that. You know, none of these projects we just launched in the U.S. Those are the things that, you know, make us confident that we can get growth out of this business, and take it to the next level.
Great. I think another one of your underappreciated parts of your story is the magnitude of store growth that's embedded in your outlook. Maybe firstly, for those that might not be as familiar with Levi's, can you just talk to us about this new next gen store concept? Maybe you can highlight any economics or why it's such a compelling growth driver for the company.
Yeah, I mean, it's truly underappreciated. When I joined the company, I thought I did you know quite a bit of research, but I didn't realize that we had at that point about 2,300-2,400 stores about you know a decade ago. You know, most of them were franchised, so we had about 400-500 of our own doors. When I looked at the economics, those did well. You know, there were clearly a opportunity, especially when we are trying to sell a lot more of a head-to-toe look. You know the tops and drive a better gender balance. Initially, Europe took this on. Europe opened a bunch of doors and sorted what we wanted to connect with the consumer and sell.
Their balance on gender or their balance on tops is, you know, really higher and different to what the company is. As you know, retailers, if you truly want to drive brand experience and engage in more of a head-to-toe look, it was important for us to try and grow our own doors and lead from front so our franchisees can follow. We opened over the last couple of years, 70 net doors a year. Our Analyst Day talked about 80 net doors, so it's increasing a little bit, but, you know, that's because we're testing Dockers. Dockers has no retail doors in the U.S. We're testing Beyond Yoga. We should have a door or two open by the end of the year.
In the U.S., which is primarily wholesale, we're accelerating what we call full price mainline doors. We had, you know, a sprinkling, largely an outlet business of 30-odd doors. These doors, in terms of look and feel, are about 3,000 sq ft, a good assortment between men's and women, equal. Wherever we have an equal assortment, you know, eureka, the business is 50% men, 50% women. Wherever we are, you know, able to show our tops, T-shirts, polos, and shirts, you know, the tops business is much higher. I think the way we assort is going to be different. You know, the look and feel of the store is more younger, better fitting rooms, you know, the connected digitally. You know, you can walk in.
If you don't find a product, you can order it online at the store itself. Things like that. Some basic things that other retailers do that we, you know, have learned over time that is important. That's why taking that and leading from the front is critical. You know, we were in Scottsdale a couple of weeks ago. People say, "Why do you go to Scottsdale when it's 115 degrees?" We took our board there because we opened a couple of our own doors, and you know, we wanted to see it and experience it, talk to store managers, et cetera. You know, the stores look great. Assortments are selling well.
You know, we came back more energized that this is something we can continue to scale in the U.S. You know, that's why in the Analyst Day, we talked about plans to grow our mainline, which is our full price door presence in the U.S. It also helps some of the door closures in wholesale besides taking charge of the experience, directly.
Got it. That was a very full answer. I appreciate it. Maybe shifting a little bit to denim, right? You and Chip have consistently talked about the strength of this denim cycle. I believe last quarter you guys disclosed that your iconic 501 style was up about 40%, and that was quite balanced, right, over both men's and women's. Can you just walk me through what gives you confidence that this denim cycle still has legs to go here in this environment? Why particularly do you think Levi's can continue to gain on top of your leading market share position?
Yeah. I mean, a couple of reasons. We are market leaders in denim. We've grown share even during the pandemic. You know, when one thought you're working from home, people were buying a lot of tops, but they bought tops, but they bought a lot of denim. You know, our own market insights group continues to see data that says that, people are picking jeans as they return back to the office because the, you know, office is becoming a lot more casual. You know, right now people want people, employees to get back to work. You know, they don't care what they dress. They want people to just get back to the office. The second is comfort is important.
Yeah, we were the first to launch the Baggy Fit. It was pre-pandemic. Reading trends, you know, we were the first to move from low-rise to mid-rise to high-rise. We were the first to launch the skinny jeans. As market leader, you know, driving understanding trends, driving trends is a key piece of what we do. That's the first piece of you know, why we think the denim cycle is here to stay. You know, these trends are not necessarily only in the U.S., we're seeing it globally, you know, from that perspective. That's the first piece. You know, we gave data, you know, I think in our quarter two that the jeans market was up.
If you look at the last 12 months, you know, it was up 19%, slightly higher than apparel. As people go back to experiences, people are dressing more casually. As a market leader, it's our, you know, job to ensure we lead trends and set trends. You know, we're not only focused on jeans, we also focus on, you know, growing our tops business, and we underpenetrated, you name it. You know, we still sell three bottoms to a top. I mean, you know, we like to sell one top to a bottom. You know, but over the last seven-eight years, that number has come down. We used to sell seven bottoms to a top.
It's come down by more than half. You know, but we still have huge opportunity to continue to accelerate that.
Thanks. Another topic that remains top of mind is inventory management, right? Especially for retailers in this environment. Can you just talk through how you would respond to any investor concerns about, you know, the 29% year-over-year increase in inventory on your balance sheet? And then what is your outlook for inventory as we head into the back half of this year?
Yeah, I mean, you know, it's the number one topic within the company. It's you know, if it is, it's an investor concern or question, it's also a company question or concern. You know, what we try and do you know, in a backdrop where supply chain issues continue to remain, we're not out of the woods there. If someone said, we are out of the woods, I'd say, you know, while it's gotten a little better, we're not out of the woods. You know, I'm still I still am chasing on a daily basis you know, product because you have to match, you know, what consumers want and what you have. You know, it's always a wonderful dance.
There's a supply chain piece. The other thing that as you asked in our business we do have a lot more core so you can carry it you know from season to season and that's important. The 29% number that you saw grow that you know which was growing year-over-year I think the best, because last year inventory positions around the industry and relative to us were lower. The best way to look at inventory in my view is look at it versus 2019. 2019 was you know versus 2019 we're up 24%. You know we have received goods earlier than we normally get just because lead times have become a lot more difficult and longer and supply chain issues.
We have about 10% or so that we have received earlier. You know, Beyond Yoga and we took back our distributor and our licensee in Thailand that added about 3%. If you take that out, inventory growth relative to 2019 is in the low double-digit. Our expectation on sales based on the guidance we've given in quarter two is around that number. It's a good inventory growth to sales ratio comparison. We are, you know, on a daily basis, I look at what I can defer and cut, you know, just to manage exposure. This number already includes a lot that was cut, you know, so we have to just ensure that we balance demand and supply.
What happens to inventory over the next couple of quarters, you know, we are implementing, you know, upgrading to the new SAP, you know, on the cloud platform, in Q1 or Q2 of next year. We will build a inventory for the U.S., which is largely a core market, you know, so really starts in Q3 and Q4. Then things get better in Q1 and Q2 of next year. It is a bit of consumption of working capital, but the balance sheet is fairly strong of the company. You know, we have a lot of cash. We have access to liquidity, and so we feel generally comfortable.
We're trying to balance demand and supply, you know, as and ensure that we don't build a lot of inventory that we will need to mark down. Because inventory is largely sold through seasons, the markdown risk for us is relatively lower than a lot of others.
Okay. You know, two of your major customers and bellwethers in the industry, right? Target and Walmart have lowered their outlooks right, in the recent weeks and months and have cited elevated inventory and apparel within their channels. Can you just help us frame your exposure to both retailers and any visibility you have on some near term order trends?
Yeah.
Maybe taking a step back, just zooming out for your full U.S. wholesale business, are you seeing any pockets of concern with inventory in the channel?
Yeah, you know, again, I'm not gonna comment on quarter three for you know, a whole bunch of reasons. You know, it's always a discussion with retailers relative to Walmart and Target. It's, you know, first, overall, our exposure to any one customer is not concentrated, so we don't have a customer who's about, you know, who's more than 10% of our business. Walmart and Target both are in the mid-single digit as a percentage of sales. The decline that we saw, at least in quarter two, was in the mid-single digit. You know, a lot of our product, even at value product is core.
It's not seasonal, so you don't have Valentine product, for example, on the shelves, so you don't have stuff like that. You know, as we have discussions with our retailers, it's clearly a question of, okay, how much inventory do you have? What's the sell-through rates, and how much can you replenish over time? You know, we look at trade inventory levels, and again, look back in 2019, and trade inventory levels when we reported our quarter two were generally in line with what we had in 2019. That's how we are managing through this, Chris.
You know, we did talk about Europe, where customers do pre-book and, you know, the pre-book orders were still up for the second half in the high single digits, so that we gave that indication. The only other thing I would say, relative to a couple of years ago, the brand's in a much stronger position. We do bring traffic to retailers, and I think some of them have publicly said it. I mean, Kohl's, you know, recently announced a SilverTab program, which, you know, some of you have seen. That is when we've assorted the SilverTab to Kohl's, and it's a big driver of how they are bringing traffic to their doors.
I think, you know, having the brand in a stronger position does drive a better leverage in negotiations with retailers as they think through inventory. You know, I've been through six recessions. I hope I don't go through a seventh, but I've been through six. One of the things I've noticed, and this is not necessarily true of Levi's with all the great brands, the one who's been associated with, even in tough times, consumers turn to brands they trust. If you have a dollar to spend, you spend it on the brands you trust or on products that are more relevant than not. Our job is to ensure that we continue to engage with the consumers and continue to build that experience.
If they have limited dollars, it's spent on the brands they trust versus the other brands.
Got it. Maybe shifting to your European business. I believe you guys actually increased your underlying sales growth outlook last quarter despite some of the inflationary and FX headwinds facing the market. For those of us that are not on the ground in Europe, can you just help us frame why, you know, what your business in Europe is all about? Why you think it's holding up better than some of the rhetoric we've been hearing from some retailers? Are there certain countries that are really outperforming and that are strong growth spots for the company?
Yeah. I mean, I think, you know, some of the well-known brands continue to see similar trends in Europe as we do. It's not only us, number one. Number two, in Q2, I think Europe is up 3% reported, but 15% constant. Foreign exchange or the euro is a big drag. You know, our expectations were up in constant currency for the year on the back of a good Q1 and a Q2 also. You know, coming in, you know, we were seeing good trends. Europe, I think the headwinds are largely our business in Russia, which is temporarily suspended. Most of the stores are suspended and foreign exchange.
The reason, you know, we continue to see a positive business and growth, besides the brand being really strong. You know, pre-pandemic, for a number of years, we were growing 20%. Economies were not growing 20%, I can tell you that, right? We were growing 20%, and because the brand's strong, we execute really well. We provide more of a head-to-toe look. The assortment is more harmonized between wholesale and our own stores. We were opening a lot of stores. We continue to open stores, et cetera. I think those are the factors that continue to drive confidence in growth. The other thing is, you know, a large part of Europe was closed last year, you know, during COVID and everything else. Now it's open.
There are a lot of tourism happening in Europe today. Trying to find hotels or flights is still very difficult. I think tourism has returned to the big cities. Our presence in Eastern Europe is still small. It's largely Western Europe, and those economies generally are doing well. I think the U.K., France, are doing well. Germany is probably, you know, not doing as well as those markets or the other markets I've talked about. Overall, you know, we have a strong team on the ground. I think those are the factors that give us confidence in Europe.
Europe is a high gross margin business because direct to consumer is, you know, it is more 50-50 in direct to consumer wholesale than, say, the U.S.
Understood. Thank you for that. Then maybe let's shift our conversation over to your margin outlook, particularly gross margins. If you can talk through some of the structural tailwinds you guys have at your backs in the coming years, you know, which gives you confidence in your overall margin outlook, that you guys provided at, you know, your investor day over the medium term. That's the first part of the question. Then if you could also just talk to us about how some of the headwinds, such as, like, input costs, like cotton, freight costs, when we might start to see some of that begin to roll off and actually turn into tailwinds as we look on a year-over-year comparison.
Sure. I think first, the longer term, you know, this is a structure, and then I'll talk about 2022. In terms of the structural tailwinds, you know, the businesses that we're focused to grow and accelerate growth are largely gross margin accretive. I talked about our e-commerce business. International is higher gross margin than the U.S. International, our growth algorithm says will grow faster than the U.S. That's been our history too. Our women's business, which will grow faster than men's, is also higher gross margin. Structurally, the areas we're focused on are gross margin accretive. That's the structural piece offered. That's why during Investor Day, I think we talked about gross margins growing, I think 30-40 basis points a year, structurally.
In terms of your question about some headwinds, right, that we've seen so far. We saw higher air freight. Q2 was a good example. Air freight cost us 80 basis points in gross margin. You know, we've had higher air freights just given the supply chain issues. I think you'll start seeing that probably taper off in the second half and then in 2023. So that's one piece. Freight generally. Ocean freight has gone through the roof. It's beginning to come down. If you look at the spot rates, ocean freight is coming down. Though, you know, what we have negotiated with ocean freight, those rates are still lower than the spot rate. So hopefully, you know, sometime in 2023 you'll see a little bit of that.
Probably not in 2022, but probably in 2023. Cotton, which tracks at 70. On average, I think the median is between $0.70 and $0.80 a pound. If you look at the December 2022 futures, it's in the mid-90s right now. It had climbed all the way to $1.52 in April, okay. When you bought for the H2 of this year and H1, there were prices higher than $1. I think cotton begins to taper off and turns into a tailwind in the second half of next year. We already bought the first half, so it's the second half of next year. I think that's.
Those are the puts and takes, I think, on gross margin. We did in our Q2 sell more off-price units. You know, I think it was 100 basis points that are built into our gross margin. Despite that, our gross margins were a record for quarter two. I think and we've got a similar amount built in in the second half. It's difficult to predict promotion levels, but given where the brand is, given the fact that we sell a lot of core, we're gonna be, you know, fairly, you know, tight on markdowns and promotions, you know, I think even in the longer term. We are seeing the benefit in AURs, et cetera.
I think those are the puts and takes. We have taken pricing, Chris. We started taking pricing over a year ago. We took pricing in the first half. We've taken more pricing in the second half. I think as you think forward, we've, you know, we'll take a little less pricing, even though if there's inflation, we'll try and offset that through productivity and other things. Our view is, as we take pricing, we look at price value. You know, I think the value that we continue to provide to the consumer is superior, continues to be superior, to some of our competitors.
The best example is go into any, you know, large, premium retailer and just look at our product and look at what that's selling for versus the others. You know, I think you'll understand there's still a reasonable value that the brand offers.
As a quick follow-up to that, is there any pockets of the business where you guys still think you have some room for further pricing? Or is the approach you're taking more dynamic, and you're gonna see how the consumer environment plays out, and be a little bit more reactionary?
You know, we continue to look at pricing. You know, I mean, a couple of things are important. One, our competitive position has to be superior for us to price. The products that we are offering, you know, provide good value. Value in terms of relevance, right? Not in terms of price, so you can, you know, price for it. That's the second piece that's important. I think pricing going forward will be more targeted, more surgical versus a general price increase that we've taken over the last 12-18 months. That's how we're thinking through it. Where we have done it's sticking.
We took some pricing in the second half of this year based on my, you know, walkthroughs with stores and store managers. It continues to stick. I think it'll be more thoughtful than in the past. We're also using AI and machine learning, just trying to understand the sensitivity. I think where we will be a little bit more thoughtful in terms of assortment will be on tops because that's under-penetrated, we want to grow it, et cetera. You know, being the market leader in denim and the relevance of our product, you know, taking a little bit more pricing on the bottoms versus top is how we're thinking through longer term.
Thanks. That was really helpful. Thanks for providing that. Maybe I think we have time for maybe one more question before we round out this session. Let's revisit, if you don't mind, your new commitment on capital return priorities. If you can walk us through that, and then maybe you can layer in how you guys are thinking about M&A, and whether that's something you think you could take action in this type of environment. Or, you know, does the management team prefer to kind of, you know, wait until we're in a cleaner environment?
Yeah, capital allocation, giving clarity on that was important, and especially, you know, having a couple of years under our belt as a public company. As we laid down, our thought is, our first port of call is to spend capital to grow the business. We're talking about 3.5%-4% of capital. And that capital is largely new stores, remodels, technology, as we build an AI machine learning shop, et cetera. We're also spending capital on improving either capacity or infrastructure. I talked about the ERP. I mean, that's a five-year project. The second piece is, you know, we're building distribution capacity in Europe as well as in the U.S.
We're taking back, you know, e-commerce fulfillment, which is largely third party in-house. That's capital. The second is, you know, paying dividends. You know, we said we'd grow dividends in line with net income. That's the second piece. The third is, again, it's acquisitions, both organic, which is taking back things like our distributors, some franchisees, which is high ROI, and inorganic acquisitions that I'll talk in a minute. The fourth is, you know, if there's no great ROI idea, you know, buying back stock, and we've started doing that, as you know, more to offset dilution, but also to, it also helps, you know, return capital to the shareholders. Return on invested capital is an important metric.
It's in the mid-20s, you know, for us. To ensure that we are disciplined around capital, we have introduced return on invested capital as a metric in the long-term compensation of leaders beginning 2023. You know, we have relative TSR, and now we have our return on invested capital. We also have a kicker on DE&I initiatives and how that's improving the culture of the organization. We're really focused on ensuring we not only grow the business by allocating capital in the right way, but also improving returns. To your question about acquisitions, you know, we did buy Beyond Yoga last year, so things were still up and uncertain, but we decided to do it. It was funded out of cash.
It was getting us into a category that continues to grow, is complementary and allows us to own a larger share of the closet. You know, that was important. I think, you know, the ink is still dry. We're still integrating it. Our job is to first ensure that that's a success before we go out and do something different. The areas we continue to look at is how do we accelerate tops, how do you accelerate women's outerwear and footwear. Those are the four real categories as we build more of a head-to-toe look. I'd say, you know, give us a little time to get Beyond Yoga to accelerate, and then we'll start thinking of other things. That's not, you know, M&A, which is inorganic.
M&A is not built into our growth algorithm of 10%-12% annual shareholder return. You know, that will be on top of it.
Great. I think we'll leave with that. Harmeet, thank you very much for your time. Aida, thank you as well. Hope you guys have a great summer, and looking forward to catching up at the end of 3Q results. Thank you, everybody, for joining, and have a great rest of your week.
Thanks, Chris, for hosting this.