Investor Update 2021

Oct 13, 2021

Welcome and thank you for standing by. This is a restricted line. This meeting is related to Wells Fargo Business. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this call is subject to prosecution to the fullest extent of the law. Any unauthorized person on the line at this time, including press or media, please disconnect from the call at this time. All participants are in a listen only mode until the question and answer session of today's conference. I would like to inform all parties that today's conference is being recorded. I would now like to turn the conference over to Ike Boruchow. Thank you. You may begin. Thanks, Courtney, and thanks, everyone, for dialing in. So my name is Ike Boruchow. I'm the Soft Lines Analyst at Wells Fargo. We appreciate all you who dialed in today. And more importantly, we appreciate Levi's for being with us. And we have we're lucky enough to have CEO, Chip Berg CFO, Harmit Singh and of course, Aida Orphan as well with us. So I want to thank the team for making the time and such an uncertain time for the Softlines Group. So I know this will be really informative for everyone. And before we start, I want to give one more heads up to all the investors dialed in. This will be basically a fireside chat for the first half of the call with me asking the team questions. And then around the 30 minute mark, we're going to open it up to your own questions, which the operator will help out with that. So just get aware. Okay. So I guess we'll start it up. Chip, I mean, thanks again for being with us. I really wanted to start with the top line physiology and the top line drivers of the business. I know there's plenty of time for margins and cost questions later. But specifically, the topic of denim cycle comes up, all the 3 of you guys are the market share leader in denim. I'd love to get more perspective from you just on what you're seeing in your own denim business, how this is informing your strategies into 'twenty two, what kind of tailwind is this in terms of is this multi year, is this 12 month? Just I think that's probably a good place for us to start. Okay. Well, first of all, I thank you very much for having us this morning, and we're delighted to be here. There are a number of factors contributing to the results that we delivered this past quarter. We were really pleased with our overall results with net revenues up 3% versus the pre pandemic levels, really strong profitability. And it's clear that on the one hand, there are some good tailwinds for us. Clearly, the casualization trend that started before the pandemic and goes back quite a while here in the U. S, the pandemic has accelerated the casualization trend. It is now I know we've got folks on the call from other parts of the world. We're starting to see places where it used to be suit and tie and more formal business wear in the office. We're starting to see casualization happening in other parts of the world that have been kind of holdbacks, if you will. So the pandemic has clearly accelerated the casualization trend. And then we've been talking about these new looser fits and silhouettes, which we actually we led this trend. I'd like to say that's what market leaders do. Market leaders drive category growth, and that's what we've been doing here. But we led these trends. Actually before the pandemic, we launched our collection, a small capsule really of looser baggier fits. It was something that team had picked up and we launched it. And when Levi's does something and goes big, it can move the needle. And those fits caught on and we just kept doubling down through the pandemic. And as we're exiting the pandemic, it is clear all you got to do is walk down the street. These new, looser, baggier fits and silhouettes are definitely driving business. And I think I was the first one to call it 3 quarters ago that we are in a new denim cycle. The last denim cycle actually predates me at this company. I joined the company over 10 years ago and the last denim cycle was really driven by the skinny jean. Venom cycles are good for the business overall. They're good for apparel overall because as the silhouette changes, it also drives changes in tops, it drives changes in footwear. So we're clearly benefiting from all of that. But I would say it's not just the tailwinds that we've been driving. Our business is really, really strong. I mean, I would come back to just the overall strength of the Levi's brand around the world. And we doubled down on marketing and connecting with the consumer during the pandemic, and I think we're starting to see that. Now just to dimensionalize what's happening in the denim category, For the last two quarters in a row, the jeans business has grown faster than total apparel. That's U. S. Only data. It's only it's the only good quality data that we have on a shorter time frame. And the U. S. Adult genes category over the last 9 months has grown to $11,200,000,000 which is significantly ahead of both the pandemic period, which is $8,500,000,000 Pre pandemic, it was $10,600,000,000 So So that is, I think, a real clear signal that denim is surging. Back to the brand strength, our denim bottoms business grew double digits this past quarter, really fueled by women's, which outperformed every category of our business. Our women's bottoms business was up 18%, which was pre pandemic, and men's was up kind of high single digits. So we're feeling really good. Brand strength is probably amongst the strongest this brand has ever been and we're driving growth across all the channels. Super helpful. I guess one follow-up to that is, so the category is clearly doing very well. Are you taking share at the same time? Like, can you talk about other brands you're taking share from? Are there certain outlets where you see more share opportunities? I guess, this is kind of balance just the category growth versus your own ability. I know your market share is already the highest out there. Are there opportunities to take share along the way too? Yes, absolutely. And we are building share. In fact, just to dimensionalize it on a year to date basis, and this is NPD data. The U. S. Jeans market is up 5.7%. We're up over 6%, 6.2%. So that clearly suggests we're growing share. The share data we get, which varies around the world, clearly indicates that we're driving share growth on the women's business. Med's business is more well developed, as you know. And the share doesn't move a whole lot, but we are growing share, broadly speaking, here in the U. S. And around the world. Got it. Super helpful. Okay. So Harmit, this might be more conversation for you, but I think we can't have a conversation on any brand in space to day without digging into the supply chain and inflationary pressures. So you guys were you won the prize. You're one of the first to comment on the pressures next year, which was met with a nice sigh of relief for the space the next day. I think you talked about low single digit inflation in the first half, and now you're thinking mid single digit inflation in the back half of 'twenty two. You're also saying you believe you can offset these headwinds, which is pretty impressive. Maybe just talk us through how you're able to do that? What are the initiatives that you have in place to offset those pressures? What exactly are those pressures? I've had some people ask me, is that all cotton? Is that other things? So help us with that. And then similarities and differences between today and 2011? I know you gave some details on the call, but going back to that would probably be helpful. Sure. Again, good morning and thanks for hosting this and importantly for everybody joining it. I wanted to let me start by just talking about supply chain and address your questions on inflation. But I think as Chip referenced on the call, our view is our supply chain is a competitive advantage. And I'm going to leave you with 3 thoughts, which is we believe is diversified. We believe the team has been very agile and continues to be agile and then productivity in cost management, which will address your inflationary pressure. On the diversification, we source from 24 countries around the world, not any country, not one country makes more than 20%. So we're not concentrated. And because we have a high core base, we've established sourcing of our core products from more than one source. So we can cross And the proof of this has been evidenced when there was a big debate about tariffs in China. We were importing from China into the U. S. 2 years ago, 8%, a couple of years before that, it was high in mid teens, it's down to 1%. We're able to cross source or transfer production in other markets. Wait now, which has been in the news, continues to be in the news. Our sourcing from Wait now is less than 5%. So there's an old thing, which is don't put all your eggs in one basket. And I think we're demonstrating that as we have diversified this. I think the second all of us woke up to the news this morning that the Biden administration is working to increase the throughput in the West Coast by 20 fourseven just a working mechanism, it's where the rest of the world is and I'm very glad the administration is doing that. But we've seen congestion in the West Coast now for about 12 plus months. It started soon after the pandemic and we were able to do in front of this by just putting a switch on or whatever. We were able to divert our supply from the West Coast to the East Coast. And the West Coast, which used to make about 40% of our logistics into the country, is now down to 20%. So we continue to try and be as agile as we can. And this is just an example. Your question on cost management, we buy in 2 halves. We don't buy cotton directly. Most of our manufacturing is done through 3rd parties. And because we have a large core, we can't or some of the core items place orders for longer than 6 months because it's largely stimulus or same style. It's not too high in 2 halves. We did lock in for the first half of next year, which is 2022, inflation in COGS. And COGS is more than quarter at about 1% relative to 2021. And because of the pricing we've been taking, you were a little skeptical of the view that inflation would be transitory because our view is what how do you define transitory? And if you go back into the 1970s, people thought inflation would be transitory, but it lasted a couple of years and most people see how to be proactive and we were. So we've been taking pricing now for a little while and that will really help us offset the inflation expenses. The second half, the other good news this morning is cotton is down. I know we track it, I think, a couple of times a day. It's probably from the $1.13 it was when we printed our earnings is tracking in $1.05 futures. As you can see futures, futures do taper off as you start getting into the mid to the second half of next year. So we're in the process of pricing our cost for 2022 in the second half. We think we'll be able to land in the mid single digit. And the reason it's not 30% up as cotton is because we don't the entire cost of manufacturing for us is more than cotton. We use our cotton's come in the 18% to 20% is cotton, 2 pounds of cotton for a pan. Our tops are much less. So as an overall cost of goods, cotton is substantially lower than the 18%, 20%. So it's not all cotton. The other piece is, Chrysler is a wonderful opportunity. This is we continue to drive productivity. We continue which is using the same fabric across a whole bunch of styles. We as we have reflected in the last few calls, we have talked about driving more commonality of assortments and the pandemic brought that on because you can move inventory, etcetera. So we're driving a lot of productivity as well as trade management to try and offset some of these costs. So that's one cost which is COGS. And as I said earlier, we have price. We believe there's parking power. He talked about market share growth. Our AURs are up in the mid teens, and that's, I think, a combination of both pricing as well as ensuring that we continue to premiumize the product. So I think our view is if we have to surgically take pricing to offset some of the inflation pressures in the second half, we could do that. And that's something that we're very conscious of. The other costs relate to shipping costs, 70% of our shipping capacity to the first half of next year is locked. And because we're choosing smart, our view is that we will air fit, we've continued to air fit in quarter 4 as in quarter 3. And given our gross margin accretion, we're more than offsetting that. That pressure probably continues for a couple of quarters and at some stage, it should settle. And so that's how we are thinking about ensuring they're able to chase into demand. In terms of impact, our impact in quarter 3 in terms of, say, lost sales was minimal. It's about $10,000,000 It's a little more in Q4, but as you see in Q4 guidance is also progressively getting better. So things like concession, etcetera, decreased and obviously that's a bit of a tailwind as we head into 2022. Got it. All right. That's helpful, Harmit. Thank you. I've got 2 more before I open up. I read your last question, which was how we did it today since 2011. I think Chip was just getting on board as we Let me headed into the crisis. But Chip, why don't you talk about it because the company is so good. So I mean, I actually joined the company back in 2011 as the new CEO. And just to keep this very brief, we are a dramatically different company today than we were in 2011. We are in a much better and much stronger position to face not just cotton, but I would say inflation much more broadly. Our businesses dramatically, just to dimensionalize it, In 2011, 58% of our business was in the U. S, 48% was U. S. Wholesale. We didn't have a strong brand back then. We were somewhat beholden to our wholesale partners. We didn't have pricing power back then. Today, we are much more diversified and it all gets back to the strategic choices that we took 10 years ago. We're a more premium, more diversified business. Today, we're starting to approach 60% of our business outside of the U. S. International mixes more positively. It's a higher gross margin business for us. We're much more DTC back in 2011. 21% of our revenues were DTC. This past quarter, I think we were 35%, 36%. At the end of last fiscal year, I think we were close to 40%. And as I said earlier, we have a stronger brand. I mean, we took pricing in the second half a year ago and it's sticking. And we took that pricing anticipating inflationary pressures. And if we need to take more, we're confident that we can take more strategically on a very targeted basis. So it's a much stronger brand. We're now leveraging data science and AI machine learning to make pricing and merchandising decisions, promotion decisions. So it's like a night and day comparison. And that gives me a ton of confidence that no matter what is thrown at us, we're going to be able to navigate it navigate through it. And I think the challenges that many of our peers have seen in this most recent quarter, the fact that we were able to get through it, talking about a $10,000,000 impact to our top line on $1,500,000,000 suggests that this is a team that kind of knows what it's doing and can manage through these difficult times. Got it. Well, I want to ask you one more, but then I have one last one for Hermite before I open it up. But I wanted to kind of transition to capital allocation, but more specifically, Dionne Yogo, you gave a lot more details on the last call. You're not really a company that's known for big M and A. I mean, you seem very excited about this deal. I mean, what were the key drivers behind that decision to acquire that brand in that category? And then when we think about modeling this out over a multiyear period, what's the potential here from a revenue perspective and a margin perspective for that asset? Yes. When we did our roadshow, we talked about capital allocation and we also talked a little bit about M and A and what our filters are. And we have 3 filters. Number 1, there has to be a strong strategic rationale behind a potential acquisition. Number 2, there needs to be a very strong financial case. And number 3, there needs to be a good culture fit. I've done acquisitions in the past. My years at Procter and Gamble, our need's done acquisitions in the past. I was involved in the Gillette acquisition. I was the 1st procter that I dropped in. And culture and culture fit is really, really important. So we added we have that as one of our culture as one of our filters. And we've been looking at acquisitions for a while. I mean our balance sheet is super strong. And I think a lot of you all have been asking, what are you going to do with all that cash? We've been looking at them. But until now, we really haven't found anything that really needs those three filters for us. So what do we like about Beyond Yoga? 1st of all, 1st and foremost, it provides an entry into the fast growing, high margin premium activewear cycling. It is the U. S. Is the largest market of athleisure or premium athletic wear. I think we said on the call that the total athleisure market is flat times bigger than denim in the U. S. So it's a huge market. Performance quite a bit is obviously a little bit smaller, but it is a high margin fast growing business and growing globally. This is not just a U. S. Phenomenon. Number 2, I really believe and the reason I'm excited about this is if we take what they bring to the table, they have a really good deep understanding of their consumer. They created a community behind the Janard Yoga brand. They have amazing product. And consumers talk about its buttery softness, and that is a big differentiator. And it competes at a premium price. And then you take the fact that it is largely a direct to consumer business. So take all of that and the incredible team that is there, and it's a small team, along with the other impressive fact that really kind of blew me away since I like to think we're a pretty disciplined leadership team and Harmit and I are financially pretty disciplined. This company has never lost money. It's been in business for 16 years. The last 10 years, it has grown double digit and they've done it the whole fashion way. They never went to private equity for money. They never had to take out a loan. They just basically cloud their cash and earnings back into the business every year and continue to grow it. In the last 10 years, they've grown double digit. So that put that together with our capabilities, brand building skills that we've got here. I spent my entire career until I came here working at P&G building brands, large and new brands. We've got I think we've demonstrated that we know what we're doing with the Levi's brand and the turnaround that that brand has had over the last decade. So you take our brand building skills, you take our capability in brick and mortar retail and DTC overall and you put that together with the pipe that we've got built to our global distribution network with on the ground operations in about 60 countries. You put all that together and you go, this could be really big for us. And you're not going to pin me down to a number or a timetable, but the fact that the plan has been double digit for the last 10 years and been profitable and we said on the call that it's going to be accretive right out of the gate from a margin standpoint, we're confident that this is going to be a long term play for us and it will be a meaningful contributor to our overall portfolio over time. Fair enough. And I will not try to pin you down on this call, but maybe later. My last question, Harmit, this is probably a question we can talk about for 100 and 30 minutes. But I guess the concept of margins in the entire space is just seeing record high margins in a lot of instances. I think you talked on the call a lot about the current state of the margins. For your brand, I think you said something along the lines of 3 quarters of the gains you're seeing. So right now, you said it could be sticky, maybe a quarter of them are transitory. Can you just elaborate a little bit more on the puts and takes? And I guess where I'm coming from is, I know when I look at our margins and our model, we're assuming your margins rebase a little bit closer to 12% next year as things do, to use your words, that kind of normalize a bit. I think the Street is closer to 13%. I guess, How do we think about the trajectory of margins as we kind of go through the transitory versus the structural changes in the business? Yes. First, our view is that we continue to grow margins. That's the growth algorithm we talked about when we took the IPO. We were asked how high is higher, what's your target, we said 12% plus, and we've delivered on that. So as you think about where we end the year, EBIT margin would be 12% plus. To the question on gross margins, when we said gross margins grow 40, 50 basis points every year, the pandemic accelerated a whole bunch of things. It accelerated our structural focus on e commerce. Our women's business continues to roll. Women's gross margins are not higher than men's. And we completely under penetrated there. International is still only it's in a good place and everything is open international, only 55% of our business. The world's entire market, 75% of that is overseas. So I think there's an opportunity there. And we are now demonstrating their impact. So the reason I kind of said, okay, gross margins were up over 400 basis points in quarter 3. And what do you use for modeling purposes as you think longer term? I think 3, 4 of the bag is structural, is here to stay and is driven by the fact that I talked about. About 100 basis points is probably driven by the environment, is driven by lean inventory, it's probably driven by low promotion levels, etcetera, etcetera. Now does this speak or not? That's probably anybody's call. Our view is as a brand, we're going to do everything we can to ensure continue to get what we can for the brand, etcetera. But if market turns promotional, then it's a different story. Our wholesale U. S. Wholesale gross margins have never been this strong because we have pushed premiumization and we have reduced market under dilution. The other piece in our gross margin that is incorporated, thanks to Q3 and Q4, is higher airfreight, about 70 basis points of airfreight. That's something that we think doesn't last forever and at some stage it normalizes. Those are the puts and takes. Our view was, Mike, because the run rate could be used as a base for growth next year. Our view was rather than use the run rate for H2, it's important to use the where we end the year, understand what are the puts and takes and then grow off that. So I think your point about starting with a base of a little over 12% and growing off that is probably the best way to look at it versus starting off a base of 13% and going from there to 2022. There's still a lot of uncertainty. We just talked about commodities, etcetera. But I think intrinsically, growing EBIT margins and growing gross margins is something that we our growth algorithm aspires to do. It will be put and take given the environment, but that's what we have demonstrated both pre pandemic and demonstrating during the pandemic, we continue to demonstrate post pandemic. Should we expect, just like with the IPO when you targeted 12%, now you've gotten there, I mean, above 12%, I mean, regardless of next year, should we expect another multi year kind of target or long term target from you guys at some point in the near future? Yes. And thank you for bringing that up. We have toyed it's been 3 years since we've gone public by the summer of next year. So we have toyed with the idea of doing an Investor Day, probably somewhere on the East Coast, so we can get a lot more participation, a pretty summer next year. We're just waiting to what you're waiting for is some kind of establishment of things getting a little normal. And so our view is when we both earnings in Q4, we'll probably give a perspective on 2022. And then a longer term view, sometime before summer of next year, that's when we will talk about what is our growth algorithm, what are our margin targets and where does this company go. Your question on Beyond Yoga, that probably gets 1% because we've integrated the business, we've established a plan, etcetera, etcetera. So I think just bear with us for a few more months. Let's just settle down and then I think look at us because we are a group that wants to grow this company for the long term and I think even longer term is important and that's at this point of time. Got it. Super helpful. Makes a lot of sense. All right. Well, Courtney, I will pass the mic to you and I think we can open up the call to questions from the investors who are dialed in. Thank you. We will now begin the question and answer session. Mike, the group is referring to you. Our first question comes from Michael Fitzsimons. Your line is open. Hi, good morning. Thanks for taking the time. I just wanted to understand the AUR comment and I think you talk about mid teens AUR increases, but I don't know if that was in a specific geography or a specific channel. And then just broadly, if it's across the board, maybe just like just talk about that level of pricing and how much is sustainable, how much you worry about or don't worry about? Yes. Mike, the AUR increase was across the board, across all channels. So it's across geography, it's across channels. And it's I'm just looking at the data, it's across gender. So it's I think demonstrating a couple of things. It's demonstrating pricing far. It's demonstrating the fact that as U. S. Wholesale returns, we are now growing our business with retailers like Target where we expanded big time, AOS is stronger than or higher than some of the other mass retailers. We are now at Nordstrom, we talked about pop up stores there, etcetera. So the question about is this will this stick or will it not? I think we continue to believe A, the fact that we are unlocking AI and machine learning to try and accelerate that. We continue to believe that the brand can be demonized. And just think about the U. S. Being largely a good market versus Europe and many countries in Asia more better and best. And as we grow our direct to consumer business, which is largely better and best, that's where we see the improvement from a premiumization perspective. So those are broad strategies. Should we expect this team's growth forever? Obviously not because this gets stronger. But I think as we continue to bring in more innovation, And if you think about pricing, I only look at pricing in 3 buckets. There's pricing for inflation that includes foreign exchange, which we do source in dollars and sell in local currency. Is pricing for innovation and to introduce new styles to talk about the loser bag of fits. And we've been adding a lot of sustainable elements to our product. The question is do we price for that? And then there is reducing markdowns and promotions. I would say we haven't we've done a little bit of pricing for inflation. Through the pandemic, we accelerated that during the pandemic. We did a little bit of pricing for innovation. We kind of activated that and we reduced margins. So as you think about AUR tailwinds going forward, I think, is largely going to lead to pricing for innovation and driving more premium products over time and then making sure we offset inflation. Okay. Thank you. Our next question comes from Michael Oskomis. Your line is open. Thanks. Hi, guys, and congrats on a great quarter. Just a quick question on the full year guide. I was wondering if you can give any sort of commentary around Q4 and why it was kind of brought down so much? Is this also a supply chain or is there any other puts and takes that we should be aware of? Yes. Our full year guide was that on a revenue basis, we had close to 'nineteen levels. On an EPS, I think it was $1.43 to $1.45 which is probably a 27% increase relative to 'nineteen. So the company is a lot more profitable. Gross margins, I think the on gross margin, I think, we said a little north of 5% to 7%. Now the implied and you talked about Q4. I think Q4 top line was up, say, through 7% on a reported basis. And a few words that we did raise the expectation with EPS of $0.30 to $0.40 And so the puts and takes, I think the segments were FX impact about a point in top line. And I think we said we'll offset that with Beyond Yoga. So again, I don't know because we didn't give an expectations for quarter 4. When we gave the last guidance, we talked about the second half of the year. So folks may have implied what quota co was, and so we just clarified it. But on a full year basis, we're ending the year stronger than what we indicated in the last quarter. And just for everybody's just as a clarification, when I talked about AURs in our mid teens, I was talking about direct to consumer. As a company, our AURs are more in the high single digit growth, but it's AURs up mid teens for direct to consumer business. So I don't know if that answers your question. Yes. I guess my question was, sorry, it wasn't fair around revenue. You guys said you guys were going to be above 2H growth rate guided and then now it's kind of lower. So that was the question for some hot line. Yes. I think the only headwind that we saw was probably foreign exchange. The and that's largely driven by the euro. We thought we'd offset that by including John yoga because we have 2 months of John yoga in our numbers. But profitability wise, we did raise expectations for the year. Thank you. Our next question comes from King Vandenberg. Your line is open. Hey, guys. Good morning. Thanks for taking the time. In recent calls, you discussed how your U. S. Wholesale is in much healthier place today than pre COVID. I guess, could you just talk about what COVID did to accelerate the changes that you had been making? What those changes were are and where you are in the process of improving the U. S. Business? And then finally, just how do you feel about your current distribution footprint in the U. S? Thank you. Great question. I'll take this. So I would say the pandemic had probably a real positive impact on our U. S. Wholesale business, less in terms of what it did for us and more in terms of what it did for some of our customers. I think it gave everybody an opportunity to clean up their inventory, get focused on their e commerce business, build new capabilities on e commerce and a lot of those things will come back to help us. So we have remapped our U. S. Wholesale distribution prior to the pandemic, probably 18 months, 2 years prior to the pandemic, that's when we really started it was about the time that Sears was going down. That's when we had started our test with Target. We're really happy with the Target results. We're now in 500 doors, which was kind of the goal that we had set. But if you go into a target that has Levi's, what you see is 2 relatively small pads for men's and women's, but a really good representation of the brand, some premium pricing there in terms of the mix of the items that we've got. They're carrying our wholesale items, but they're carrying a more premium mix of our wholesale items. So we've got some bottoms in there going out the door at nearly $50 We've got truckers in there. So we've been really, really happy with that. That has been accretive. We're pitching up new consumers. They've done the research and demonstrated to us that these are consumers that in the past have not bought Levi's. And because it's in their favorite parts of the shop, they're now buying Levi's. So that's been a real positive. We've really tightened our focus in a couple of other wholesale customers to really focus on the top 100 or 150 doors as open to buys were shrunk going into the pandemic. We started saying, we don't really care what we look like in store 650. We want to be great in those top 100 doors that do the majority of their business. And so that was another big pivot. And then we basically exited the off price channel. And off price is not brand accretive. It might be good from a share standpoint, but it's not brand accretive. If somebody can walk into Ross or T. J. Maxx and buy a pair of Levi's for $16.99 it's just not great for the brand. So we had made the decision to kind of pull the needle out of the arm on that. So all of these things have kind of come into play. And then the final piece, I guess, is our focus on premiumizing the marketplace. So a much stronger presence now at Nordstrom, where we've actually got a pop in shop now, which is really, really working well and looks great. So all of this has been an effort to just premiumize the brand and it's working. But clearly, we have also been helped by the fact that our customers' inventories are clean. We're not getting the pricing and promotion environment in U. S. Wholesale is a lot of full price selling, not a lot of crazy discounting because they've got clean inventories and consumer demand is strong. So we don't need to. And that has clearly helped as well, along with the fact that many of these customers have accelerated their e commerce business, and we're benefiting from that as well. So Harmit said it earlier, we used the phrase, the pandemic has accelerated change in so many different places. It accelerated the landscape shift in U. S. Wholesale, and you see it in our gross margins right now. Got it. That's very helpful. So just to make sure I understand, other than off price, there wasn't really any major exiting of sort of full car doors. Just want to understand that. And then one last question maybe for Hamid. You guys have seen a really nice continuing acceleration in U. S. Wholesale. Should we think of that as sort of restocking or is that representative of underlying demand? So your first question, I think as those closed, there was an accelerated pace of closure of those in the wholesale. There was a time when our mix from traditional retailers, the Pick N More traditional retailer, I think the Big 3 is a big 4, was pretty high. So when Chief talked about U. S. Wholesale being 50% of the business, our traditional retailers were close to 20% or something like that. Today's mix has those underperforming those have closed. And I'd like to say, a sad mix, this brick and mortar is approximately 10%. So the growth is really coming from the nontraditional retailer. That's, I think, that's good news. So it's just been strengthened the structure of the business. I think pre the pandemic, U. S. Wholesale was a little volatile. If you look at pre pandemic the last couple of years, U. S. Wholesale was kind of flat. We were offsetting door closures with getting more floor space, improving AURs and accelerating women's. I think today there is growth in U. S. Roles. It is going to be modest. And when we talk about our growth algorithm, when things normalize, we will talk a little bit about how we continue to grow this at a modest pace. So that's just in response to your first question. To your second question about our people building inventory, that's just chasing demand right now. And we're not necessarily based on recent performance or recent results as we start the quarter, we're not seeing demand curtail. So our hope is that the inventory that's being sold in is inventory that sells through. And so we're not seeing a dramatic change in health tourism at this point. I mean, our view is holiday will be a relatively strong holiday season. It has, like it's already probably started. And I think Vienna has talked about 3% to 5% increase year over year. And as we just get a sense of demand and where people are, It's indicating that it's linked to a strong holiday season. Now brands that have inventory and someone asked this question, I think, during earnings, I didn't think it would be a tailwind. I'd be asked. When do you build positive inventory growth year over year. But I think as we said, we believe because our fiscal ends in November, a month before holiday, in our view, it's probably end the year slightly up relative to inventory relative to last year 2019. And I think that's just indicating that we also think the holiday season will be relatively strong. Thank you. Our next question comes from Dave. Your line is open. Hey, guys. Thanks for taking the question. I wanted to go back to Q3 results. And I know you guys had mentioned on the Q2 call that June was up. June sales were up mid single to high single digits against 2019. And then the number for Q3 overall was about, I think, 3%. So can you just go through where the deceleration happened? And then I know you had guided to that and maybe there were some pent up demand benefiting June. But if you could be more specific about which regions or channels you saw that sequential deceleration now, John, Phil? Yes. Sure. Good question, Thanh. It was largely Asia. Asia, the lockdowns accelerated Asia. I think number of stores in Asia that were closed through the quarter were about 20%. Asia was down 23 odd percent, 23 something like that. So I think that was the one reason that was a bit of a drag. Europe continued to grow strength to sorry, U. S. Continued to grow strength to trend and Europe as it I think July lockdowns increased and then as they exited, the quarter came started a little better. So those are the factors that impacted the different regions. Having said that, as we exit September and get into October, most of our doors in Asia are now open. We see our Asia business improve dramatically from what we reflected in quarter 3. So we'd probably be down, but not as slightly down as it was in Q3. I think and we've seen general strength continued strength in the U. S. And Europe. So I think Asia would be probably the region that has improved performance in Q4. Got it. Yes. That was going to be my follow-up. As you go from 3% to the 6% to 7% in the guidance, is that really all Asia? Or are you assuming acceleration anywhere else? Yes. I think it's Asia is, I would say, a big factor, slight further strength in Europe because Europe was just getting out of lockdowns. But I think those are the two factors that drive it. And the only thing I would say, just from a timing perspective, Black Friday the impact of Black Friday because we're looking at relative to 'nineteen, in quarter 4 'nineteen, there was really we didn't have the impact of Black Friday. It's going to be a positive headwind in Q4, it's about 2 points of growth. Got it. Okay. Thanks. Our next question comes from Dick Mohan. Your line is open. Hi, guys. It's Mohan at Point72 here. Thanks for taking the time. I guess to your early denim cycle commentary, I guess as we think about both the impact of casualization here and abroad plus the shift to wider silhouettes, what would really give you, I guess, pause or hesitation around that? Is there anything any kind of KPIs or things you're looking for just in case that trend maybe starts to fade or switch over a little bit? Well, we're watching it pretty closely. And I wouldn't go out on a limb and say that this is going to be like skinny bottoms that lasted over a decade. And by the way, women are still buying skinny bottoms. So that hasn't completely gone away at the expense of these looser bag of your fits. And we are watching it kind of quarter to quarter. It was about 50% of our bottoms business this past quarter. It was about 50% the prior quarter. It seems to have I don't want to say leveled off, but it's kind of been consistent over 2 quarters. We'll have to see how it continues to go. We're watching the consumer. We're all over social media because we're looking at what are the young kids doing, which drives a lot of this. And it still seems to be resonating. But I'm not here forecasting it's going to last like skinny bottoms for the next decade. We just got to stay on top of it. And what I continue to reinforce with the theme is we need to continue to just focus on the consumer and what is the consumer looking for and meet those needs and ideally be out in front of them. But just to give you a couple of numbers here, our high rise and looser fashion fits on our women's business were up 81% versus 2019, almost double where they were in 2019. 2019, it was a relatively small collection and now it's half of our volume. And the 501 we talked about on the call, the 501, which is for a franchise, if you will, is up 20% versus Q3 2019 combined between men's and women's, and both were up and up real strong. So we watch it from quarter to quarter. It's really hard to predict these things. I mean, when we first launched that first collection right before the pandemic, I wanted to predict it that this was going to start a new denim cycle. But so that's we're continuing to keep an eye on it and it seems to be working. I mean, all of our competitors are following it. So that's an indication that they see it too. That will fuel it further. And so I think we're in for a ride here for a while, whether that's another 2 quarters or 4 quarters or 4 years or 8 years, I don't know. And it's just really tough to predict new things, which is part of what makes Watson so much fun and so exciting. Got it. And just kind of one follow-up question there. I think to your point earlier, the last denim cycle over a decade ago. And kind of the first mover advantages going back to that denim cycle was pretty big, but then the trend brought it out and not everyone, but a lot of retailers started following it. Is that kind of happens on this denim cycle? What do you think are the kind of risks and the opportunities as more people start to move into these silhouettes and these new house? Well, as I said, I mean, I think it validates that this is the look and it increases the odds that it really does drive the denim cycle, I believe. So it kind of floats more boats. And we feel good about the fact that the jeans category, at least here in the U. S. Where we've got the data, the jeans category is growing faster than total apparel. Now admittedly, we were pummeled more than total apparel during the pandemic. But the fact that competition is moving into these same silhouettes, we're talking about them on their earnings calls as well. I think that makes sense. Real, it's legit. I think the expectation is that it's going to provide a tailwind for a period of time. And I think it's good for the industry and the category overall. As I said earlier, I think, Ike's first question, as the market leader, and I've worked on market leading brands back before in my P and G life. I ran the Gillette business for several years. And it's a responsibility of market leaders to drive category growth. And it feels really good to be driving growth at this growth rate right now across the entire industry. When the total category grows, it doesn't have to turn into a share war, in a zero sum game, which is what happens when categories are flat or declining. And so we feel really good about the robust category growth and we are gaining share through it. So that's kind of a double win, if you will. So I don't worry about the fact that competition has followed. I actually think it's a big thing for the category, for the industry and ultimately for us. Great. Thanks a lot. I think we need to begin to wrap up the call. There was one final question I did want to ask. Harmit, I know you talked about the Beyond Yoga acquisition in general, but just bigger picture, the capital allocation strategy going forward? I mean, you guys did the buyback program, dividend and M and A. Just I don't think you spent $800,000,000 in capital last quarter. So just strategy going forward on how we should think about uses of cash? Yes. No, I think thanks, Mike, to answer that question. The company is so much stronger than it was pre pandemic profitability wise and even from a cash perspective. As a company, coming into the pandemic, the focus was revenue and profitability. I think during the pandemic, we accelerated our focus on cash. And cash conversion now is part of a bonus program for all the executives in the company in the annual plan. And so we're generating a lot more cash today than we were in the pandemic. Now the question and we've always said, and this company really hums. It generates a lot of cash. The question is how do you allocate it? And I think for the first time, probably in the history of the company, it goes back 150, 160 years, this kind of unlocked all the levers of cash, cash deployment. The Q1 of call is spend capital to grow the company. And twothree of our capital deployment is really growth capital, new stores, technology, AI, etcetera, etcetera, some infrastructure capital as we build a distribution center, upgrade our ERP, etcetera. But so that's about, I would say, 3% this year, long term between 3% and 3.5%. The second is returning capital to our shareholders. The reinstated dividends will impact the 'nineteen levels. Let me introduce the share buyback program largely for a couple of reasons. One, float is more than double that it was during the IPO. I think you want to put money where a mouth is, you think there's intrinsic value. And the last time we did share buybacks, we did create value. And the third is just to offset valuation and employee stock. And the 3rd pillar is all about M and A, organic M and A, which took back Romania, which took back, yes, I think in another market sometime in the last 12 months. But independent brought beyond yoga, and we're going to grow that and scale it. So I think as we think about capital allocation longer term, the company will generate some cash and those will be how we prioritize. 1st, capital to grow the business, returning capital to shareholders and then M and A. We're not going to do M and A on a regular basis. We now have to ship we've done one. We have to scale it on the right, so it makes sense and then think about other categories that we want to grow. Excellent. Well, Chip, Harmit, Aida, thank you so much. Everyone who dialed in, thank you for dialing in. And we appreciate it, and hope everyone enjoys the rest of the week. So thanks, everyone. Thanks for having us, Ike. Thank you. Bye bye. Bye bye.