... Good afternoon, and welcome to this next session of the GS Retailing Conference. My name is Brooke Roach, and I cover the apparel brands and softline sector here at GS, and I'm thrilled to introduce our next session with Levi Strauss. Here with me on stage, returning for the first time since twenty nineteen, is Harmeet Singh, CFO and Chief Growth Officer. Welcome, Harmeet.
Thanks for having us, Brooke. Glad to be here.
Very excited to have your return.
Yeah, good to be here.
Harmeet, you've implemented several strategic changes to the business over the last few years. What do you think have driven the most momentum so far, and what do you expect will be the most important driver as you look ahead into 2026?
Straight to the most pointed question, but let me start with a comment. We are in a quiet period, so I'm not going to talk about, you know, financial performance, outlook, or current trends. I'll go back to, you know, what we reported on our earnings, I think, in the middle of July. We're about a month away. October is when we report our Quarter Three, and so we'll talk about performance and trends then. To your question, I think overall, you know, I'm really pleased with the progress on the transformation of the company that's been happening over the last eighteen months. You know, we are fundamentally moving to a very different company, higher growth, higher margin profile, stronger cash flows, higher return on invested capital, and, you know, higher direct-to-consumer.
I think, as we think about the company, the vision, strategic vision of the company is to become a company with $10 billion in revenue and operating margins of 15%. And our core strategies that we're executing, that, you know, led to high single-digit growth now for the last three quarters, higher than and faster than the category, is really driven by, you know, being more brand-led. This pivot to DTC first, not DTC only, it's DTC first. Wholesale is a very important part of the business model, and powering the portfolio, which is about, you know, growing international, as well as, we have a second brand called Beyond Yoga. Now, what's really happening, in terms of the transformation, first, we've narrowed our focus.
You know, we've exited Denizen, we've exited a small footwear business, and we've just exited Dockers, largely in the U.S. and Canada, and we'll exit Dockers by the end of January 2026. They're largely low margin, low profitable businesses, so that we can focus on Levi's and accelerate Beyond Yoga. So that's the first piece. The second piece is about changing the ways we work, and as a wholesaler, our go-to-market calendar was 16 months. We're trying to bring it down to about 12 to 13 months. I mean, if you're really gonna grow our tops business and continue to accelerate our DTC business, the go-to-market calendar has to be shorter. We're eliminating SKUs, unproductive SKUs. I think we eliminated about 15% as we make way for the new SKUs.
And so that's the second piece of it. The third is productivity, driving productivity on DTC. I mean, there's a myth which says that if you grow your DTC business, it will dilute your operating margins. You know, we are actually changing that. Our operating margins, you know, over the last three years have actually grown, as has our direct-to-consumer business. So our direct-to-consumer business was 40%, I think two or three years ago. It's 50% this year, and operating margins are up two, two and a half points. And so that's, you know... And we're driving that productivity, largely through revenue versus cost. You know, it's higher revenue per sq ft. So that's the third piece of it.
And, I think the fourth piece of the transition is about, you know, becoming more of a denim lifestyle player. It's not about lifestyle for the sake of lifestyle. It's about, you know... What we really did was we edited to amplify. We said, "We'll narrow the focus on denim. We're known for denim bottoms. Let's be known for denim shirts. Let's be known..." You know, I'm wearing a western wear. We've just launched a new western bottom, in Cavender and Boot Barn, as we, you know, penetrate the quiet western trend that we're seeing. And so that will really drive, you know, the future growth of the company. And so, you know, I think great foundation for 2026. You know, because we'll have a great year this year, and then, you know, we'll take it to the next level in the next few years.
Great. You mentioned denim several times-
Right
... in your introductory comment, which makes sense given the company. But it seems to have... Denim seems to be having quite a moment right now, and, I guess one of the questions we get most regularly is how much of a tailwind Levi is getting from the denim cycle versus what's happening within your own company. How long do you think that this denim silhouette trend shift can last, and how are you thinking about price versus units?
Yeah. Oh, that's a lot of interesting questions. First, the denim category is a large category. I think it's about $100 billion globally and is expected to grow in the mid-single-digit range. And so we start with that. What is actually driving this and the denim cycle that you talked about? I think a couple of things. First, the overall umbrella is the world's becoming a lot more casual, right? And you know, denim is a key driver of that casualization phase. So that's the first piece. The second is, you talked about silhouettes, and I just want to you know, clarify the myth that it's not only silhouettes. There are a couple of other things that are happening. Yes, the looser, baggier fit is in vogue.
I think if you think of our assortment base, it's about 15% of our assortment base. It started with her, and men are quickly gravitating to it, so there's that piece. But it's not 80% of our business. It's only 15%. The slim and the skinnier fit is still about 20% of our business and growing. When I joined the company in 2013, and I think in 2014, I was asked, is skinny dead? I was asked the same question about a year ago, and no, it's here. We've got the silhouette for people, you know, who like the skinnier, slimmer fit. So that's the second piece. The third is this quite Western trend that's emerging. It's a subtle Western trend. So I'm wearing a Western shirt as an example.
We just, you know, signed up Shaboozey to help us grow the Western look for men, and so there's that piece of it, and then as a company, because we're really focusing on denim lifestyle, as the world becomes casual, we're growing our non-denim business, and non-denim, again, a less known fact about us, non-denim is about 40% of our business and growing. You know, and the way we're growing it is, you know, we launched a performance tech, which is more, you know, in the performance wear category. That's doing really well. Chinos is a big piece of our business and growing, and the other way we're expanding our addressable market is we're getting into denim skirts, denim dresses, denim jumpsuits, which we never played in.
So, you know, if you want to own denim, really the head-to-toe look should be denim. The other piece that is helping us as against others, I'm wearing something called a Blue Tab. It's the premium offer. It basically very successful in Asia. It is really started and was inspired by Japanese denim, which is a premium, you know, denim fabric and, and selvedge, and that's what we're taking around the world. We introduced it in the U.S., done really well. We're bringing it back in a bigger scale, and we're taking it to Europe. So I think as you think about the brand, it's premiumizing, it's, you know, different trends. It's not one trend. The different trends are helping the category, and as leaders, if we grow, the category grows.
You started the conversation with the DTC first strategy-
Mm-hmm.
And DTC is now over 50% of total sales. You've had a lot of quarters of sequential comp momentum. What gives you confidence that you can continue to comp to comp, and how are you thinking about DTC first across your outlet versus your full price business?
Yeah, sure. It was about DTC first, because we think DTC. You know, we can lead with DTC, and wholesale is a great complement to what's happening on our direct-to-consumer business. For clarity, you know, DTC is our stores, mainline and outlet, and is our e-commerce business. So we've had 13 consecutive quarters of comp sales. In the last quarter, I think we talked about high single-digit% comp sales. The way I think about direct to consumer, I like to call it a trifecta, okay? Which is you grow your same store sales, which we've done nicely and successfully. Grow e-commerce, and I would say in the mid-teens%, and then open new stores. You know, today, we have about 3,200 stores around the world.
We operate and run about 1,200 stores, and our guidance this year talks about 50-60 net stores this year. Assuming, and we believe we can open 50-60 for the next 5 years, so you're talking about adding another 250 stores. Now, why do we believe that we can grow our, and sustain the growth of us, in our comp stores? For a couple of reasons. Number one, we believe we're underpenetrated in women's. You know, if you take our total business, women's is about close to 40%. 75% of the shoppers are actually women, you know? And so what we're doing now with our stores is, A, the assortment is more balanced between men and women. The gross margin on women's product is higher than men's. It was not true 10 years ago.
The second thing is when you walk into a store, we normally lead with women's assortment now versus men. So I think those things are making a difference. For example, in the U.S., in our mainline stores, which is our full price stores, which we've expanded over the last couple of years, we had about 8-10 5-7 years ago. We got close to 80. Today, women's is approximately 50% of our business and really driving that growth. And we're doing it, growing while growing men's at the same time. In a more modest pace, but at least growing men's. So we think we're underpenetrated there. That can grow. We think we are underpenetrated in our tops business.
Tops is about 50% of our business, and, you know, our recent product offers are resonating really well, both with him and her. Tops, for example, in quarter two, was up 16%. So those are the things that give us confidence to grow our, you know, same-store sales, and if you think of the different metrics as a traditional retailer would, I think we've got growth by converting better. We've got growth, you know, through higher traffic and AU. I think the big opportunity for us is selling more units per transaction, especially as we become more lifestyle. You walk into a Levi's store, you walk in for a denim bottom, you like a top, you buy the top. You walk in for a top, you buy a denim bottom, and so that's where the opportunity is. That's what gives us a little bit of confidence in growing our direct-to-consumer business, which we think can be about 55%-60% of our total, you know, business over the long haul.
Great. Let's shift to wholesale.
Sure.
You've made a lot of transformation over your wholesale business over the last decade, but can you provide an update on what you're seeing in the wholesale environment today across geographies, including recent sell-in versus sell-through trends? Any notable differences across distribution tiers?
Yeah, so wholesale is very important to us. I mean, there's no way we can reach all our consumers around the world without wholesale distribution. We also have great relationships, you know, with a lot of wholesale customers. I mean, recently... This morning, Macy's reported, they talked about us. Target reported a few days ago, they talked about us. Boot Barn reported, they talked about Levi's as a brand, et cetera. So I think, you know, the relationships are good, the product offers are working. In wholesale, you know, our view and our growth algorithm assumes wholesale growing a lot more modestly, because it's a channel we don't directly control. You know, we upped our guidance for the year for wholesale to flat to slightly positive.
We've had a couple of quarters where wholesale has actually grown in the mid-single digit to high single digits. We've had a good run so far. I think as you think about the profile of the business, the department stores, traditional department stores, which were about 20% of our total business, are now approximately 7-8%, so the concentration on department stores is much less. But we have an opportunity with the department stores to grow in areas like women and tops, where we are underpenetrated. And we're working with different, you know, wholesale retailers to get a little bit more floor space. It takes a little time, and that's where DTC first is important, because they see the product working in DTC, and then they're buying into the new product. So that's the first piece.
The second is, you know, we're trying to get distribution where, you know, we haven't been present. I talked about Cavender, that we've, you know, we're just beginning to, you know, add our product assortment, and it'll take a period of time for that to roll out. Boot Barn, the assortment, we have expanded, especially for her. That's gonna probably make a difference over time. And, and that's how we're thinking about wholesale. The growth is really coming from pure play, think Amazon, think Zalando. We're also trying to control the offer, so in the case of Zalando, we've got our own marketplace, as an example. And, you know, really, also focused on growing specialty, which is Urban Outfitters and the like, and I think that's where we're really focused on growing wholesale over time.
Very clear. As we think about your business, you've had a great partnership with Beyoncé this year. One question that we get regularly is: how do you cycle that-
Yeah
Next year when the partnership concludes? How are you thinking about that?
Yeah, so, you know, the partnership has been great. It started with, you know, her team calling us, saying, "She's launching this album, Cowboy Carter, and she's got a song named after you, and, you know, would we be okay?" We were more than okay, you know, and it's a relationship that we've sustained over the years, you know, starting with, when she first started, the Destiny's Child, part of the Destiny's Child band, so it was more organic. We quickly launched a partnership, which was, you know, about, four chapters, titled Reimagine. We took some of the old ads and collaborated on a couple of products, and it's been a home run, as you can see from our results.
I think, you know, it's one of the factors where, you know, which has enabled the momentum that we're seeing in the brand. The way we think about it is, you know, how do you take it from where it is today to the next level? We have got a couple of things we're working on. We just launched the ad campaign with Shaboozey, again, to grow our men's business, and our Western wear. You know, we've had a couple of great collaborations. You know, this year we had the Nike drop. I'm wearing the Nike collaboration. You know, we had the Bob Dylan movie that again resonated, and brought the product, you know, to life, which was wonderful.
As we think about the next year, it's about sustaining this momentum. Next year is about sports. I mean, this year was about music. The music, you know, being center of our culture continues. Next year, we've got the Super Bowl at the Levi's Stadium. We've got the World Cup at the Levi's Stadium. So I think there are definitely a couple of things that we feel over time will continue to maintain the sustained growth that we're seeing. Because we'd like to be a mid-digit growth company, which is about 5%. This year, our guidance is, you know, in that range, and if you can grow that sustainably over time, you know, you're talking about this company, you know, getting to the $10 billion path, you know, long term.
Very clear. How would you characterize the health of the Levi's consumer today? And one question we're asking all companies at our conference today is whether or not they expect the environment in the second half of 2025 to be better, worse, or the same relative to recent?
Yeah, I know, it's. I wish I had a crystal ball, could help you with that. But generally, you know, given our results and momentum, we're finding the consumer broadly resilient. I mean, so you think of the Levi's consumer largely, you know, earns, you know, 100,000 and over, and that consumer, you know, we are seeing generally resilient, number one. Number two, if you think of the consumer overseas, in Europe, we've seen some great growth. Again, resilient. The consumer is a lot more resilient than we probably anticipated at the beginning of the year, and similar trends in Asia and in Latin America. Now, you can't take this for granted.
We have to earn the right, and that's what, you know, good marketing offers, good product offers, you know, help, and good partnership with our wholesale customers really brings the product back home. You know, the second half, our guidance for the second half is a little bit more modest than the first half, and that takes into account a couple of things. One, there is some pricing taking effect to offset the impact of the tariffs. You know, we don't know how that lands, so we're being a little cautious. You know, we're very confident about our product offers and our marketing. The second is that, you know, we're lapping a much stronger second half than a year ago, and the third is, you know, we're making some changes in part of our transformation and our distribution network.
You know, we remapped our distribution network in Europe. We're doing that in the U.S. Really building a network that services an omni-channel consumer, especially as we grow across both channels. So those are the reasons, but to answer your question, I think, you know, there are probably gonna be winners and losers, you know, as the macroeconomics play out. I think we'll be in the winners category because we have the product, we have the people, we have the stores, and we have great marketing, and I think that combination probably helps us.
Have you been experiencing any anti-American sentiment globally? Are there any specific regions to call out, and how are you navigating this environment more broadly?
Yeah. No, we haven't experienced any anti-American sentiment. You know, we've been present overseas for the last eighty years. You know, we are a purpose-driven company, so over time, we have developed deep relationships with the local community. The best way to inspire and excite consumers is to give them what they want in terms of product offers and make them feel good wearing our product. So, you know, we're being very thoughtful. We're being very diligent in making sure that we, you know, maintain the relationship. As an example, we launched a couple of years ago, our loyalty program, and the loyalty program, we have over forty million consumers. We're adding a couple million a quarter.
My own view is, for a brand like ours, we should have close to a hundred million consumers, and I think just keeping the storytelling going and making the product relevant is important, and so far, you know, no negative anti-American sentiment reflected on the brand.
That's great to hear. Tariffs are the other topic of the year. How are you thinking about the potential magnitude of tariff headwinds at current rates, and what proportion can you mitigate over time?
Yeah.
How should we be thinking about the timeline to mitigation?
I think, as we said in our quarter two earnings a couple of months ago, our assumption at that time was that the impact of tariffs would be an additional 10% on product imported into the US from the rest of the world and about 30% from China. Given the latest round of reciprocal tariffs, that's probably a little higher. We felt very comfortable mitigating, you know, most of the tariff impact, and that's why we also raised guidance when we reflected the results. You know, the way I think about it, because there's an incremental impact, it's minimal. It's manageable, especially given the brand momentum.
It probably, you know, it's not double what we talked about earlier, largely because the new tariffs went into effect early August, and we have a couple of months left in the year. We're thinking through 2026 thoughtfully, because we have a little bit more time to negotiate with our vendors. Given that two-thirds of our growth has been volume driven, we have the volume that we can leverage. You know, so we're working with our vendors. As we simplify SKUs, drive more fabric rationalization, I think those are areas that can continue to improve our cost of goods sold. That will help mitigate tariffs. We've taken a little bit of pricing in the second half. At the time of announcing earnings, we hadn't seen any impact on demand.
We'll talk about more about that when we report our Q3 earnings in October. So there's a little bit more time to think through that. The way I think about the brand is, I think we provide great price value to our consumers, and as long as we can do that, even in a higher tariff environment, even if after taking prices up a little, I think we'll be able to continue to grow market share. It's important to have the right product offers and then, you know, price products effectively. We are thinking through pricing. Everybody's thinking through pricing. You know, for us, it's more targeted pricing.
With so much innovation coming, we're thinking, you know, our pricing is gonna be driven by a new offer, as well as, you know, we are making a full court press and selling higher full price sales than we've done in the past, you know. And so, managing the life cycle of our promotions in a better way, as we become, you know, a DTC-first company. And so those are the things we're thinking through, so that the impact on the consumer from a pricing perspective is as minimal as, you know, you know, the environment allows for.
Helpful. On inventory, what are your expectations for inventory growth into the back half? And are there any things that we should be aware of given the disruption?
Yeah. So I think quarter two inventory was up mid-teens. It was largely up. A large part of the increase was because we brought in product for the second half, given the proposed tariff increases. We probably, at that point, had 60% of what we needed for the second half in the U.S. As we think about the rest of the year, I think, you know, and the good news is inventory is generally healthy. You know, I think our healthy inventory has never been as healthy, say, over the last couple of years than it is today, so the increase is largely driven by, you know, the tariff impact, number one.
Number two, with some disruptions in the Red Sea, you know, we've had to increase the cover, both here and in Europe. And as long as the business does well and, you know, a large part of our inventory, two-thirds of our inventory is core. Think the 501s, think the 511s. And that we can carry from season to season. So, you know, even if demand, you know, slows down a little, you know, that's something that we can easily withstand. So I'd say inventory, you know, we'll project the inventory growth when we give Q3 earnings. But, you know, as of Q2, it was about up mid-teens.
Helpful. Your gross margins have reached record levels. If we put all of this together, how should we be thinking about the levers that are most untapped for future expansion into 2026 and beyond?
It's good, you know, high gross margin. I think we'll close the year a little over 62%. You know, three years ago, it was 57%, so we've kind of, you know, grown gross margins nicely. It's good evidence that the brand has momentum, right? So that's a good indicator. I think the factors that have driven higher gross margin, one is the structural shifts in the business. Higher DTC is higher gross margin. Higher women's is higher gross margin. Higher international is higher growth. So the areas we're really focused on growing are actually gross margin and accretive. You know, the other thing is we're making this push into selling higher full price sale.
I mean, that's a metric that I look at closely, and working with our commercial people, it's important to make sure that, you know, the brands, the products are relevant. You know, we don't promote and discount on market markdown. So that's something that's helping us. As you think forward, I think the tailwinds on gross margins are largely growth in women's business, rationalization of SKUs. As we reduce the go-to-market calendar, you know, we are actually ordering product and knowing how the products are working because you're ordering it in the twelve-month window. So I think that should help, along with helping us drive efficiency on inventory. So I think those are probably some of the tailwinds. Obviously, there's gonna be a little bit of pricing. There will be probably some impact of tariffs and so that, you know, one will mitigate the other, and so I'm confident that we can grow gross margins. I think 30-40 basis points a year for a long, long time.
This year, you showed that you could leverage your SG&A, which was a big bear point of the thesis for a while now.
Mm-hmm.
Can you help me understand where you see the biggest opportunity to drive additional leverage without compromising your growth initiatives?
Yeah. So the, you know, SG&A, the percentage had increased because revenue had kind of, you know, been flat or low growth for a while. As revenue picked up, obviously, we were able to leverage SG&A. The other piece that we have spent a lot of time is, as we become more of a DTC-first company, taking a hard look at, you know, improving our EBIT margins or operating margins in our own stores and in e-commerce. So e-commerce, for example, was losing money. Today, the e-commerce margin is fully loaded. Technology, advertising is actually accretive to the company, and e-commerce has been growing in the mid-single digits. So that's, you know, a factor of improvement.
As we brought some of the distribution in-house, you know, as you become more omni-channel, then you're able to leverage your fixed costs, so that's kind of helped, and the other thing we're doing structurally on managing SG&A costs is, you know, we've got these global talent hubs we've set up around the world. You know, we've got one in Bangalore, one in Warsaw that we're just setting up, and one in Mexico. That was largely for finance and tech talent. We are actually, what we've realized is, you know, we're getting high talent, the productivity is very high, and so we are actually expanding that across all functions.
And as we grow as a business, you know, we're gonna be growing talent in different areas, like marketing, merchandising, supply chain, et cetera, in these hubs around the world. And so that should probably help, you know, SG&A, or, you know, ensure that the SG&A growth is a lot modest. And those are the factors that, you know, hopefully, keep SG&A in control. I mean, the way we think about it, the growth algorithm is a pretty simple one. You know, grow in the mid-single digit, you know, annually. Grow gross margin thirty, forty basis points. That should, you know, grow SG&A in and around the inflation level or slightly better with all the other productivity and structural changes. That should drive EBIT margins, and that's where our view is getting to the 15% over time is, you know, definitely possible.
It's definitely possible, but is there any color that you can provide on the cadencing or timeline that you expect to get to that 15%?
Yeah, no, you know, I think we owe everybody a mini Investor Day, kind of, and, you know, a path. How does a $6 billion company become $10 billion, and how does a company that says operating margins in the mid-11s% this year get to 15%? The original thought was we'd do it this year, and then the whole tariff thing happened, so we wanted a little bit more clarity. Our view is we'll give a timeline, potentially sometime next year. And, you know, internally, because we are all compensated, our long-term incentive plans are based on, you know, long-term plans that we have aligned with the board. And our long-term compensation, the metric, 50% of the compensation is driven by EBIT margin goals and revenue goals, and they're long-term in nature.
So we have aligned with the board. You know, and this is a timeline on both getting to $10 billion and the 15%. We just want, you know, dust to settle on the tariffs, and then we'll come back and explain it to everybody here on the timeline, how to get there. But I think the overall thing we feel good about is we can continue to grow our women's business. We can continue to grow DTC. International will grow faster than the U.S. And there'll be operating margin leverage as the business grows and gross margin grows, and that's really the path to getting to the 15%.
Very clear.
Yeah.
Harmeet, we're about out of time. Are there any closing comments or thoughts that you'd like to share with the audience before we conclude?
No, I'm good. I think the audience has been pretty patiently listening. Yeah, so. And I'm sure you guys have had a busy, busy day with this wonderful conference, so, you know, thank you for having me. And, you know, but before I go, I do have to ask a brand question. But, you know, just raise your hands, how many Levi's fans in this crowd?
Levi's fans.
Levi's fans. Okay, good. Anybody seen our Beyond Yoga product? Yeah, we got some Beyond Yoga fans. Okay, that's true. A little bit, not as many hands. So, you know, hopefully by the end of the conversation, I've converted a few more to Levi's fans, and we will get, you know, a few Beyond Yoga stores here. Beyond Yoga is a brand we bought, you know, late 2021, soon after COVID. Hundred and... You know, we bought a brand that was a little less than $100 million, so close- getting closer to $150 million. It's activewear. We've got a few stores open now, in Connecticut, two there. We just opened a store in Boston. We'll have another store in... So we should have over 10-12 stores a year this year, and it will come to New York City at some stage, so.
Great.
So, yeah.
Thank you, Harmeet.
Great.
Thank you to all of the audience for listening in on the session.
Great. Thank you.