Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company third quarter fiscal 2026 earnings conference call for the period ending August 30, 2026. All parties will be in a listen-only mode until the question and answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the internet, and a replay of the webcast will be accessible for one quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Company.
Thank you for joining us on the call today to discuss the results for our third quarter of fiscal 2026. Joining me on today's call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release, available on the IR section of our website, investors.levistrauss.com.
Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and the information provided is based on continuing operations. Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to allow others to have their questions addressed. Now I'd like to turn the call over to Michelle.
Welcome, everyone, and thank you for joining us. Over the past several years, we have transformed Levi Strauss & Co. into a more diversified, higher growth company.
We have sharpened our focus on the areas where we see the greatest opportunities to win, expanded internationally, built a more balanced DTC and wholesale model, and evolved Levi's from a denim bottoms business into a leading global denim lifestyle company. While we delivered strong results across much of the business, our DTC performance fell short of our expectations during the quarter. As we'll discuss on the call, we have a clear understanding of what worked and what did not, and we have already taken targeted actions to improve performance. Before I turn to our Q3 results, I'd like to take a moment to speak to the CFO appointment we announced last week. I'm delighted to share that we have named John Vandemore as the company's next CFO.
John brings more than two decades of financial leadership experience across global consumer businesses, most recently serving as CFO of Skechers, where he helped support its growth into one of the world's largest footwear brands. He is a proven operator with deep financial expertise, a track record of driving profitable growth and margin expansion, and strongly aligns with our strategy, brand, and culture. I also want to take this opportunity to thank Harmit for his leadership and dedication over the past 14 years. He has played an important role in transforming Levi Strauss & Co. into a more Direct-to-Consumer, diversified, and profitable company. Harmit has been a trusted partner to me and to our leadership team, and I'm grateful for his many contributions to the company. Now turning to Q3. As a reminder, all numbers Harmit and I will reference are on an organic basis.
The quarter again demonstrated the benefits of our diversified portfolio and reinforced our confidence that we have the right strategies in place to drive sustainable, long-term, profitable growth. We delivered another quarter of mid-single-digit growth, up 5% on an organic basis. Year-to-date, our business is up 7% versus the prior year. Our international business grew 8% this quarter, led by Asia, which has been a consistent source of strength throughout the year and delivered another quarter of double-digit growth while profitability continues to improve as the business scales. Global wholesale continued its strong momentum, up 6%, with growth across all segments. Our strategy to expand beyond denim continues to deliver results. Categories outside our Levi's denim bottoms business accounted for approximately 50% of our top-line growth in the quarter, driven in part by accelerating momentum in tops, which grew 7%.
That said, DTC performance in the quarter fell short of our expectations, driven primarily by softer traffic trends in both the U.S. and Europe. In Europe, unseasonably warm weather across several key markets weighed on traffic for much of the quarter. As temperatures normalized, traffic and sales trends improved meaningfully, and those improvements continued into Q4 quarter to date. In the U.S., while our marketing continued to generate strong consumer engagement and reinforce brand heat, we had fewer major brand-building moments than a year ago. In addition, our back-to-school campaign did not drive the level of traffic and demand we had anticipated. Importantly, we moved quickly to address these U.S. traffic challenges and have a clear plan to improve performance. We are increasing investment behind areas of strong consumer demand, particularly low-rise fits, and strengthening inventory positions accordingly.
We are deepening our marketing investments, creating a stronger cadence of traffic-driving moments, and placing greater emphasis on mid-funnel product marketing. We are strengthening commercial execution across our stores and digital channels with a sharpened focus on conversion and other key productivity metrics.
Since implementing these actions, we have seen positive trends in our U.S. Direct-to-Consumer business. Combined with the continued improvement in Europe, this gives us confidence that DTC will return to at least mid-single-digit growth in the fourth quarter and deliver high single-digit growth for the full-year. To support these efforts and fuel growth, we are redeploying a substantial majority of the tariff refunds we recorded in the third quarter back into the business across both Q3 and Q4. In addition to increased marketing investments, we are putting those funds to work behind sharper value for consumers during key holiday promotional moments and enhanced supply chain capabilities to strengthen our competitive position and support sustainable long-term growth. I will now walk you through the highlights from the quarter in the context of our strategies. Starting with our first strategy to be brand led.
In Q3, we continued to reinforce Levi's position at the center of culture through impactful campaigns, premium experiences, and iconic brand moments around the world. A recent example of this was our partnership with one of our top European wholesale accounts, Zalando, for its fall-winter campaign that featured Lily Collins in head-to-toe Levi's and showcased the breadth of our denim lifestyle offering across Europe. Our debut at Paris Couture Week was another milestone in the elevation of the brand, bringing Levi's to one of fashion's most influential and prestigious global stages. Looking ahead, we have a consistent drumbeat of brand activations and marketing moments planned through year-end with high-impact partnerships, including Shaboozey. We are amplifying our strongest product franchises, such as loose, low rise, and Superlow, through increased marketing support and compelling product storytelling.
For the holidays, we are as prepared as we have ever been with our most robust activation plan in years. From breakthrough brand moments and experiential pop-ups to elevate store experiences, personalized styling, and curated gifting assortments, we are creating new ways for consumers to engage with Levi's throughout the holiday season. Combined with strong product newness and focused commercial execution, these efforts are designed to drive traffic, improve conversion, and deepen consumer connection with the Levi's brand. Now turning to product. The Levi's brand grew 4% with both men's and women's growing mid-single digits. While DTC pressure was most pronounced in our women's bottoms business, we have moved quickly to increase support behind winning trends and strengthen execution. Encouragingly, the DTC women's business accelerated in September, and we expect our total women's business to be up high single digits in Q4.
In men's bottoms, newer iterations of our icons, including the 501 Loose and 501 Relaxed, continued to gain traction, demonstrating our ability to drive growth through both heritage and innovation. In women's, we saw strong demand for wider leg silhouettes, and the low rise trend continued to fuel growth with our Low Loose and newer platforms like the Cinch Baggy delivering standout performance. These strong-performing franchises give us confidence in our ability to further scale proven fits and drive future growth. Importantly, growth in the quarter was balanced across both our core denim business and our expanding lifestyle assortment. Categories beyond bottoms contributed roughly half of our growth in the quarter, expanding our addressable market and building Levi's into a true denim lifestyle company. Tops delivered a solid quarter of growth led by women's tops, which increased 10%.
Growth was broad-based across the assortment with strong momentum in blouses, wovens, sweaters, outerwear, and tees. Blue Tab continues to exceed our expectations, delivering strong double-digit growth with broad-based strength across both men's and women's. As we expand the assortment into more elevated products, including cashmere and premium knitwear, Blue Tab is extending the brand into higher price points, attracting new consumers, and further premiumizing the Levi's brand in the marketplace. Entering our fourth quarter, we are confident in our holiday assortment and the continued opportunity to build on the momentum we're seeing across our lifestyle categories. Sweaters will be a key focus, complemented by fresh denim innovation across both men's and women's. Taken together, we are entering the holiday season with a stronger assortment, exciting newness across both lifestyle categories and denim, and a compelling offering for consumers around the world.
Now shifting to our next strategy to be DTC first. Our global direct-to-consumer business grew 2% in the quarter, with comp sales flat to last year, driven by the softer traffic in the U.S. and Europe, as I mentioned earlier. Importantly, both businesses have returned to positive trends in recent weeks. Our DTC businesses in Latin America and Asia continued to deliver exceptional momentum. Latin America delivered broad-based growth across key markets, while in Asia, our DTC business achieved its seventh consecutive quarter of double-digit growth, driven by strong comp sales. Both Asia and Latin America remain under-penetrated from a DTC perspective relative to the company average, providing a significant runway for continued growth. Our e-commerce channel delivered another quarter of double-digit growth. We continue to upgrade levi.com and recently improved the site with richer storytelling, more dynamic videos, and inspirational styling content.
In the U.S., we launched our AI shopping assistant, which provides styling advice, helping consumers discover new styles, and build complete outfits. While still early, we're seeing fans who engage with the tool adding to bag at roughly three times our average rate. These efforts are part of our broader journey to build an entirely new digital flagship experience, including a complete redesign and platform migration of levi.com. We are making great progress and both efforts remain on track for a global launch next year. Once complete, levi.com will offer personalized experiences, dynamic outfit recommendations, immersive fit navigation, and other unique capabilities that will convert more consumers into head-to-toe lifestyle shoppers. We're seeing positive momentum in the business and continue to expect our DTC channel to grow at a high single-digit rate for the full-year, including mid-single digit growth in the fourth quarter.
Global wholesale remained a source of strength in the quarter, increasing 6%, reflecting broad-based growth across segments, including in the U.S. The continued momentum reflects the health of our brand with key partners in improving sell-through trends. Importantly, we are seeing strength across a broader range of categories beyond denim, reflecting increasing confidence from wholesale partners in the breadth of the Levi's offering. The consistent performance we have seen in wholesale throughout the year reinforces our conviction in our DTC first, but not DTC only strategy, and demonstrates the complementary nature of our channels, allowing us to meet consumers wherever they choose to shop. Now turning to our third strategy, powering the portfolio. This quarter, our international business grew 8%, led by Asia. The momentum in the region was further supported by our breakthrough partnership with ROSÉ and a series of pop-up experiences in Bangkok, Tokyo, Shanghai, and Seoul.
The consumer response was extraordinary, and together these activations generated more than 3 billion impressions and approximately $45 million in earned media value. We are also encouraged by the progress we're seeing in China, up 13%, where we continue to strengthen the brand and enhance execution. While still early, we believe China represents one of the most significant long-term growth opportunities within our portfolio, and we are increasingly confident in our ability to unlock that potential over time. Signature plays an important role in our portfolio by extending the reach of the Levi's brand. Signature grew 13% in the quarter, driven by strength in both core denim and our expanding lifestyle assortment. Denim tops and outerwear, looser silhouettes, and new categories like maternity all contributed to the brand's strong performance. Beyond Yoga was up 9%, driven by growth across both channels.
Glo Zone, our new performance collection, which launched in July, is generating positive early results and supports our strategy of expanding Beyond Yoga into more occasions, like higher intensity workout activities. As we approach closing out the year, we are more confident than ever in the long term. Over the last three years, we have built a larger, more diversified, and more profitable Levi Strauss & Co. Adding nearly $1 billion in revenue, significant margin expansion, and stronger earnings, while significantly strengthening our cash generation. With this strong foundation, we see meaningful opportunities to drive sustainable top and bottom-line growth across our channels and markets as we further build our position as the leading global denim lifestyle company. With that, I'll turn it over to Harmit. Harmit?
Thank you, Michelle. Before we get into the quarter, I'd like to start by welcoming and congratulating John as the company's next CFO. John's deep financial expertise and strong track record, combined with the financial and growth foundation we have built as a world-class finance team, give me confidence that the company is well-positioned to deliver sustainable, profitable growth. While the third quarter had its challenges, our teams responded quickly. As Michelle mentioned, we saw improving trends emerge in September, particularly in DTC and women, which gives us confidence in the actions underway and our updated outlook. We enter the final quarter of the year with improving momentum, strong financial discipline, and a clear focus on execution. Before I turn to the results, I want to address the impact of tariff refunds, which create some unique dynamics in quarter three and Q4 results.
During the third quarter, we recorded approximately $80 million of tariff refunds, reflecting substantially all the refunds we expect to receive. We are redeploying roughly three quarters of the benefit back into the business to support future growth. These investments are expected to be split approximately 60/40 between SG&A and COGS and are focused on the following three areas: incremental marketing to drive demand, enhanced supply chain capabilities to improve competitiveness over time, and sharper value for consumers during key holiday promotional moments. Approximately $25 million of these investments were redeployed during the third quarter, with approximately $35 million expected to be invested in the fourth quarter. We believe this is the right approach. It allows us to strengthen the business, support our near-term momentum, and still deliver on our annual growth algorithm. With that context, let me turn to our third quarter results.
Overall, we delivered mid-single digit revenue growth with net revenues up 4% on a reported basis and 5% on an organic basis. Gross margin expanded 450 basis points to 66.2%. The benefit from tariff refunds, net of redeployments, contributed 370 basis points to gross margin. Excluding that benefit, the remaining non-tariff related gross margin expansion of 80 basis points was driven by lower product cost partially offset by foreign exchange. Adjusted SG&A as a percentage of net revenues was 50.8%, which included approximately $6 million, or 40 basis points of tariff benefit redeployment. Excluding that redeployment, adjusted SG&A increased 50 basis points versus the prior year, driven by higher distribution costs and deleverage from softer DTC revenue growth.
Distribution costs were higher than we expected this quarter, and the path to realizing the full benefits of our network transformation has taken longer than we anticipated, reflecting both the complexity of the transition and a fire-related incident that impacted operations. That said, we are making progress. We closed our Hebron distribution center at the end of the third quarter and expect to begin realizing benefits from the closure in 2027. In Europe, where our distribution center transformation is complete, we are already seeing distribution cost leverage year-to-date. As we continue to scale and optimize the network, we expect service, efficiency, and productivity benefits to build over time. Adjusted EBIT margin was 15.5%. The tariff refund benefit, net of redeployment, contributed 330 basis points to adjusted EBIT margin.
The remaining non-tariff related EBIT margin expansion of 40 basis points was largely driven by accelerating margins in Asia and growth in wholesale. This is a good example of the power of the and in our model. Even in a dynamic environment, the strength of our diversified business help us deliver both growth and margin expansion. Adjusted diluted EPS was $0.48, which included $0.11 benefit from tariff refunds, net of redeployment. Excluding this benefit, the remaining 9% growth versus Q3 2025 was driven by EBIT margin expansion and share buybacks. Moving to the balance sheet. We ended the quarter with inventory down 3%, reflecting continued progress in improving the health and productivity of our inventory while maintaining the flexibility to support growth opportunities. We continue to strengthen the lifecycle management of our inventory and expect to exit the year with inventory levels in line with our expected sales growth.
Turning to shareholder returns. We returned $62 million to shareholders in the form of dividends during the quarter, representing 11% increase versus last year. In addition, given our strong cash position and confidence in the business outlook, we intend to repurchase an additional $100 million of shares through an accelerated share repurchase program. Now, let's review the key highlights by segment. In the Americas, net revenues grew 2%. LATAM delivered another strong quarter, with revenues up 10%, fueled by strength across channels and growth in every market in the region. Operating margin expanded 640 basis points to 29.9%, primarily due to the benefit of the tariff refund, net of redeployments. In quarter four, we expect the U.S. to return to growth, driven by improving DTC trends. Europe net revenues grew 5%.
Similar to the performance we saw in the first half of the year, driven by double-digit growth in wholesale. We saw strength in key markets, including the U.K., Germany, and Italy, as well as growth across categories. Operating margin increased 150 basis points to 22.8%, driven by gross margin strength. As warmer weather moderated, DTC performance improved. Looking ahead, wholesale pre-bookings for spring/summer 2027 are up high single digits, giving us confidence in the continued momentum of the business. Asia net revenues delivered its third consecutive quarter of double-digit growth, up 10%, fueled by strength across channels, categories, and key markets, including Japan, India, Australia, and China. Strong gross margin expansion drove operating margin leverage of 220 basis points to 14.2%.
Year-to-date Asia EBIT margin is up 240 basis points to 16.7%, underscoring the improving margin profile of the segment and its growing contribution to overall company profitability. That sustained momentum gives us confidence to continue investing behind the segment with many of our nearly 60 net new system stores planned for Asia in the fourth quarter. Turning to guidance. Our updated outlook reflects both the benefit of the tariff refund and our decision to redeploy a significant portion of that benefit back into the business. We believe this balanced approach strengthens our competitive position, supports near-term growth, and keeps us on track to deliver our annual algorithm of mid-single-digit revenue growth with a clear path to 15% operating margins over time. Importantly, recent trends reinforce our confidence in the fourth quarter.
We are seeing improved momentum in DTC and women's, including positive growth in U.S. DTC, and we are increasing marketing support and investment behind winning products as we prepare for the holiday season. Overall, we are confident in our ability to lap this year's strong results, inclusive of the net tariff benefit, as we set the business up for 2027. For the full-year, we now expect reported net revenues growth to be approximately 7%, versus our previous outlook of 7%-7.5%, driven by the stronger U.S. dollar. We expect organic net revenues to be a little stronger at approximately 6%, which is at the high end of our previous expectations. We now expect gross margin of approximately 63% for the full-year, including approximately 80 basis points of net tariff refund benefit.
Excluding this, gross margin is higher than our previous outlook, driven by the benefit of the lower tariff rate and lower product costs. We now expect adjusted SG&A as a percentage of revenue to be approximately 51%, compared with a prior outlook of 49.7%-49.9%. This includes approximately 50 basis points of redeployment of the tariff refund benefit. Accordingly, we now expect adjusted EBIT margin to be slightly above the previous guidance at approximately 12.1%. This includes approximately 30 basis points of net tariff refund benefit. Excluding the net tariff refund benefit, adjusted EBIT margin would be up 40 basis points versus the prior year. We now expect adjusted diluted earnings per share to be in the range of $1.54-$1.56 for the full-year, including a $0.04 Net tariff refund benefit.
For the fourth quarter, we expect reported net revenues to be approximately 3% and organic net revenues to be approximately 4%, with the difference reflecting the impact of foreign exchange. We expect gross margin of approximately 61.8%, up 100 basis points versus prior year, including $3 million or another 10 basis points of net tariff refund redeployment costs. Adjusted SG&A for the fourth quarter includes approximately $30 million of tariff refund redeployment costs. As a result, we expect adjusted EBIT margin of approximately 11.4%-11.6% for the quarter, which includes 180 basis points of net tariff refund redeployment costs. This translates to adjusted diluted EPS of approximately $0.36-$0.38, including $0.07 of net tariff refund redeployment. While the third quarter highlighted a few areas of opportunity, the team responded with agility and urgency, and the actions we have taken are already beginning to show results.
Even more importantly, the quarter also reinforced the power of our strategy and the benefits of our increasingly diversified business model. As I conclude, I want to say thank you to our employees, our fans, Michelle and the executive team, our board, our shareholders, including the Levi's family, and the buy side and the sell side analysts who follow us. Thank you for your support, your trust, and your partnership throughout my tenure. Over the past 14 years, I've had the privilege of being part of one of the most significant chapters in the company's history. Together, we strengthened the business. We turned the company to the public market, built a more diversified portfolio across channels, geographies, and categories, and significantly strengthened our balance sheet and financial foundation.
What I'm most proud of is that as the business has grown, so have our people, especially my world-class finance growth and transformation team. I'm deeply grateful to have been part of the journey and to have grown as a leader alongside so many of my talented colleagues. As I look ahead, I wish Michelle, John, and the entire company my very best. I'm honored to say that this is my 56th and final earnings call at the company and my 67th as a CFO. With that, operator, let's open the line for questions.
Thank you. The floor is now open for questions. If you have a question, please press star, then the numbers one on your telephone keypad. Due to time constraints, the company requests that you ask only one question. If you have any additional questions, please queue up again. Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Your line is open, Laurent.
Oh, good afternoon. Thank you very much for taking my question. Michelle, Harmit, I wanted to ask about your DTC trends in the U.S. I know Michelle, you provided some color there about traffic trends, but could you maybe just unpack a little bit more what drove the underperformance in the third quarter? How did the quarter progress by month? Separately, Harmit, I think you mentioned that global DTC should grow mid-single digits in the fourth quarter, which is very encouraging. But should the U.S. and Europe both grow mid-single digits? I think you also mentioned that you've seen positive trends in the recent weeks. But is that a comment in line with the fourth quarter commentary of mid-single digits? Thank you so much.
Thanks, Laurent, for the question. I'll just take the whole one because it's all connected. Back to what happened U.S. DTC, and I mentioned it in my remarks. I'll add a little more color. First, I will say the Levi's brand remains very strong, very healthy around the world, including in the U.S. I know we spoke to what really drove the growth, whether that was global wholesale up 6%, really strong growth international, up 8%, e-commerce double digit, et cetera. It's worth mentioning in the U.S. that U.S. wholesale was also positive. So we really can isolate the DTC issue to Europe and the U.S. In Europe, it was very clear this was a weather-related issue. I think it's no secret that it was very warm, and it impacted footfall for the industry, really.
That impacted our business despite we had lots of great summer offerings, but the weather was at another level. When the temperatures started cooling and weather moderated, we saw the trends come back. As we are in Europe right now, DTC, quarter to date, the trends are very robust. They're positive and robust. So you should feel good about that. The other thing worth mentioning in Europe is that we had an incredible wholesale business. So suffice it to say, like I said, the brand's very healthy there. In the U.S., I'll say it again, brand is healthy. This really had to do with a tactical move around back to school and how we showed up for that period. We would say that our back-to-school campaign under-delivered our expectations. More specifically, our campaign was all around loose. Loose is still an important business.
It's a big volume driver for us, but the market in the U.S. had really shifted to talk about low. Low rise was a lot of energy and a lot of competitiveness, frankly, around that. When we saw that softening sort of July and August, the good news is the team got after it very quickly, and we sharpened our focus. We have the benefit of the tariff refunds, as we remarked earlier. We're reinvesting that back into demand generation, into marketing, and into the consumer. We pivoted into low, and so we're able to do that quite quickly. We are already seeing the benefits. So that started very tail end of Q3, but more importantly into Q4 into September. We're seeing the results. To your question on what's happening in the U.S., the U.S. DTC is now back to positive.
Overall DTC is tracking right now quarter to date mid-single digits. We expect it, let's say, to be mid-single digits for the quarter, then to end the year in what we've been performing at, sort of that high single digit. We feel very good. It's been a 360 approach across marketing, mid-funnel marketing, mid-funnel demand generation, in-store execution, et cetera. I feel that gives us the confidence to share these numbers that we're talking about for the quarter ahead. I'd also say as it relates to the U.S. consumer, the category is still strong, and we continue to gain market share with men and women, hold that number one position between men, women, and youth. I feel like we've addressed it.
Super helpful. Thank you very much for all the color. Back to you, [inaudible].
Thanks.
Thank you. Our next question comes from the line of Matthew Boss of JP Morgan. Your line is open, Matthew.
Thanks, and congrats on your next chapter, Harmit.
Thank you.
Michelle, maybe if we took a step back, can you speak to the health of the denim category? Has anything changed other than this intra-category trend change that you cited? Can you elaborate on September, maybe relative to that 4Q outlook for 4% organic revenue growth? Harmit, just any operating margin considerations for next year for us to think about relative to the annual margin expansion algorithm that you would see at mid-single digit revenues?
Sure. Do you want to go first, then I
Yeah, I'll start. Thanks for the question, Matt. I would say that the denim category remains healthy, robust, and it's attractive, right? You see lots of companies, either if they're in denim, being more assertive and competitive, or even in some cases, new entrants into the category. There's a lot of energy in denim. I'd say as the category leader by a mile, this is good for us, but it also is we get to continue to lead. Lead with innovation, lead with fits, et cetera. From that standpoint, while I alluded to that in hindsight, we would've approached Q3 or back to school differently knowing what we know today, but we've learned, and importantly, when you learn, you pivot, you're agile, and the team moved. We're already seeing results. I'll get to that in a minute.
But as it relates to our relative position in men's, and I'm speaking to the U.S. now, number one continues in men's, and we actually gained share and further widened our lead against the number two player. In women's, we've been solidly number one. Again, strengthened our position there. Youth, even despite the level of competition, we've maintained our number one position. I think importantly, we have a segmented strategy. So we have Red Tab, we've got Signature, and then we've got Blue Tab, and we are gaining market share in that $100+ segment. As I mentioned on the call, our Blue Tab business, while small, is growing double digits, and we think that's going to be a meaningful growth driver in the future. The and of this is while leading in denim, category's still growing, we are, as you know Matt, expanding beyond denim.
And so our head-to-toe denim lifestyle strategy is working. Half of our growth, so of our 5% organic growth, half was driven by categories like tops outside of denim bottoms. Tops accelerated this quarter with a robust 7% growth. So I think all in, we're feeling good about the category, but we're very present to the fact that the competitive nature has intensified. Hence, really taking some of that tariff refund money and deploying it back into driving demand and marketing so that we can make sure that we can break through.
And, Matt, to your question about the annual growth algorithm. We had a big discussion and debate around this, especially given that the tariff refunds are incorporated in the results, and that's why we talked about the reported results and the underlying results. Overall, our view is that the annual growth algorithm is intact, which is really a mid-single-digit growth company with growth in gross margins and growth in EBIT margins. So let me give you a little bit more color. The organic revenue guidance for the year, we have taken up to the high end of our range, and that's largely driven by wholesale being stronger. So wholesale, I think last quarter we said globally would be low to mid. We're now saying mid-single digits.
And that is really, I think all of you have asked us, "Why don't you grow wholesale?" But this is the second year we're growing wholesale globally, and it's profitable. Asia, which was under-levered because it wasn't growing and the margins were lower. Also, we have up to low double digits, and that helps operating margins. We end the year at about 12.1 EBIT margins all in, and which is 70 basis points versus a year ago. All of you do a great job dissecting what is tariff and what is not. Our view is all in 12.1, we will lap that going forward. So that's a new base. So that's how we are thinking about it. So, the way to think about it is we end the year on a reported number, we lap that for next year, and then build the annual algorithm on it.
Now, how are we going to lap it? There are expenses that we are undertaking to drive the future growth of the business that won't repeat in 2027. If you do advertising, as an example, as a percentage of sale, it'll be higher this year than the 7%, but we don't have to spend at this pace next year. As an example, distribution we have talked about. We are making the strategic transformation, but it was a little expensive because we're running two parallel distribution centers. It won't be at that pace next year. That's where our view is that we can continue to grow margins and obviously top line. Hope that helps you, Matt.
Great color. Best of luck again, Harmit.
Thank you, Matt.
Thank you. Our next question comes from the line of Jay Sole of UBS. Your line is open, Jay.
Great, thank you so much. I want to follow up on the last question. You gave us great color on the DTC channel trends for the U.S. and Europe, but does the wholesale business sell-through trend in the U.S. and Europe look like the DTC trend? Harmit, I think you mentioned that the European pre-books for next spring are up high single digits. If you could just give us a little bit of context for how the sell-through is running in wholesale in the U.S. and E.U., and how that's impacting the order books in next year, that would be helpful. Thank you.
Sure, Jay. I was wondering if you or somebody else would ask a question on wholesale. As I mentioned, channel has done globally, performed really well. It's what I call the power of the and. It's DTC and wholesale, which is important. Wholesale does ebb and flow every quarter, largely because you sell in, you sell floors, timing is different by customer. But overall, wholesale has been performing well globally, including in the U.S. It's profitable, which is really good, and it's across all categories. I mean, women's is performing well, men's is performing well. AURs are up and so is units. So overall, we are pleased with the performance. I mean, looking ahead, and your specific question, Jay, on sell-through. The sell-through is fairly good. We're seeing good sell-through trends. It's healthy. The pre-books are strong.
We get data on pre-books in Europe, so we reflected that. I think quarter-over-quarter, especially in the U.S., it's the ebb and flow. So wholesale in quarter four will be a little weaker than the wholesale you saw in quarter three in terms of growth year-over-year, but it is not because of weakening demand. Let me just assure you. When flow sets are set when product goes to the customer. But generally speaking, we are seeing a healthy demand from our retailers across the world.
Got it. Okay, super helpful, and Harmit, congratulations again, and best of luck.
Thank you, Jay.
Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Your line is open, Dana.
Hi, good afternoon. Harmit, best of luck in your next chapter. Michelle, I think you mentioned some events in back to school not impactful enough. What is your assessment, and what is changing for holiday? Is it the marketing? Anything with product? You mentioned low rise, and also you mentioned that the competitive environment intensified in price. Did it intensify in price and style, or what are you seeing in the competitive environment? Lastly, as you look out to 2027, I think last year was the year of music. This year was the year of sport. How do you think of next year in terms of topical? Thank you.
Yes. All very good questions, Dana. Thank you for that. Yeah, so let me add just a little bit more. I will tell you, the teams here, as we saw the issues unfolding, they were all over it. I would say just both here in the U.S. and globally, the consumer moves fast, so we have got to just continue to be on top of it. By and large, we are. I would say, but there are going to be moments like this, if you are not quite there with the consumer, then you have an opportunity to react. That is frankly, the benefit of also getting all this data real time in your own channels, so that you can impact not only DTC, more broadly.
As I have been talking about, as we took a step back, we felt like our campaign in this period of time was not as impactful as it could have been. You see that in the numbers. Our traffic was soft, so rather than continue to go that same direction, we pivoted. Our diagnostics would say that at a time when, hey, the loose business, and to be clear, it is still a very big business and it is growing, but there was just a lot of energy and excitement, whether that was online, offline, around the rise getting lower. We have plenty of it just was not our leading message. So when the team understood that, they then quickly moved to pivot into low rise. What that meant in practice was reshooting the campaign, getting that in stores, remerchandising the store.
We have a whole group of content creators in social media. We have let them loose. All of that is happening as we speak. We really put this in place right as we started September. That was for women. Then for men, and men has been a pretty steady performer, but also took the opportunity, it is a big business for us, to also re-energize the men's business, and we did that around our icons. 501, one of the top sellers right now is 501 Loose, so that baggy for men idea. One of our influencers that also has worked well for us in the U.S. has been Shaboozey, who his star power has only grown over the last year. We are leaning into a Shaboozey partnership with men.
We are really going after this low rise through digital, social, in-store, demand generation, like I mentioned, and then chased more product. So leveraging our supply chain to make sure we have the inventory. As I said, the indications are good. The U.S. trends in DTC quarter to date are positive. DTC globally overall is running mid-single digit, and we expect that to at least carry into the full quarter, be mid-single digit around the world. Similarly, in Europe. Europe is back to mid-single digit given its pivot out of this very warm weather. Then to your point on holiday, really excited about what is ahead. Being a DTC player now, it will feel very holiday. We will lean into the classic denim innovation, but we are also going to take a big position in tops, in sweaters.
We have a lot of innovation coming, fantastic store merchandising, some really innovative creative that you will see soon. Our intent is to win the holiday, and I am confident we will. Then, you asked about what does this mean going forward? We are upping our marketing game. Again, the tariff refunds allow us to redeploy right into investing in the consumer and telling our story. We expect that to be a tailwind as we start the next year. Then specifically, what is the big idea for next year? I am not at liberty to share that with you yet, but I would say we are taking all of our learnings over the last two years to make sure that we are showing up in an innovative and compelling way for our fans around the world.
Thank you.
Thanks, Dana.
Thank you. Our next question comes from the line of Rick Patel of Raymond James. Your line is open, Rick.
Thank you. Good afternoon, and Harmit, congrats on a remarkable career as well.
Thank you.
I have a follow-up on the earlier margin question. You are redeploying tariff refunds into marketing, supply chain, and sharper value for the consumers. Is it safe to assume these factors are not limited to the back half of this year and they will continue through the first half of next year as well? I appreciate your long-term algos for mid-single digit revenue growth, but if these investments do continue, what is the minimum growth that you would need to see in order to achieve operating leverage going forward?
Yeah, Rick, obviously this is not about guiding next year. I am going to leave that to Michelle and John and the team. Our view is the tariff refunds were timely. The business, as Michelle mentioned, soft, especially on DTC and women's, and we acted with agility and speed, and utilized that largely against driving more focused marketing with a real product awareness, accelerate our product off, especially things that are working, and promotional. We did not take prices down. Some retailers have. We took it up. That is not something we decided to do because we do provide good price value, but we said let us promote because market got a little promotional, especially during holiday events. Let us promote so we are competitive. Our view is it is not something that the incremental expenses do not sustain into 2027.
Our view is a mid-single digit growth does allow us to leverage to the P&L, and you will see that flow through to EBIT. We are not running away, and Michelle is completely supportive of this and so is the executive team. We do want to get to 15% operating margins. If you take the last three or four years, in 2023, I think our operating margins were 9%, we will end this year over 12%.
We are on that path and that journey. I hope that answers your question. I cannot be more specific, Rick, unfortunately, because we have not yet completed our financial plan, and John and Michelle would be the best to lay it out for you next year, early next year.
I appreciate it. Thank you.
Thanks, Rick.
Thank you. Our next question comes from the line of Bob Drbul of BTIG. Your line is open, Bob.
Hi. Excuse me. Good afternoon. Harmit, 56 quarters, huh? That's a lot of quarters.
I'm not going to ask you, Bob, how many quarters you've covered, but as a CFO, thank you for that.
You're welcome. Thanks. I guess the first question really for Michelle is, when you think about Blue Tab, I think double-digit growth, what have been your learnings thus far with that initiative? I guess similarly, when you think about the brand heat, I would be interested in hearing any of the successes you've had with collabs and what we should be looking for in the next few months in this holiday season around collabs that you're really excited about. Thanks.
Yeah, you bet. Thanks, Bob. No, thanks for asking about Blue Tab. It's something we all have a lot of passion and belief for, that this could be a real opportunity for us. As the denim leader, we have less than a 1% market share of the super premium jean category, and that should at least be commensurate with our market share overall. So you can do the math and see the opportunity. Because we have this leadership, we do have all of this innovation and knowledge about denim and the best denim. So for Blue Tab, I'd say the learnings, number one is, it is always anchored, of course, in denim authority and denim leadership. So when we use denim in our Blue Tab, it'll be that amazing Japanese selvedge denim.
I think the insight we have today versus when we've sold in the past, like denim bottoms of Japanese denim, is that this Blue Tab is this can be an entire category, head to toe, not unlike what we're doing for Red Tab. We can use the beautiful Japanese denim in bottoms, in jackets, in dresses, in skirts. If you actually see online, you'll see representation of all of those products. We can also extend into tops categories, but they need to look/feel different than our core Red Tab. I think I said in my remarks that we're getting into really elevated fabrics like cashmere, like silk, very premium blazers, denim trousers. You can imagine this whole lifestyle presentation. It's going to be a big opportunity for us.
It's one of our biggest insights is that and we're still work in process is how to merchandise it in the store. You can see a mixed approach in our stores today of some outstanding merchandising, Harajuku in Japan as an example, to where we're still experimenting. We will figure this out because it's such an incredible opportunity with price points ranging from $200- $500. As it relates to collaborations, also a great way to elevate the brand. Right now, we just launched the Sacai collaboration. You can actually see it on our site, although it's selling quickly. That's a great example of us connecting with the highest levels of couture type of thing.
We have a few more in the pipeline that we have not talked about yet, but I think what you can expect from us and a recipe that has worked is a real balance between what I'd call more commercially-oriented collabs to ones that have this very high-end Sacai. We did Valentino a couple of years ago, Miu Miu a few years ago, sort of that. The good news is, given the brand heat today, people are knocking on our doors. We've already got the pipeline and the calendar for next year, I would say. There's some really good ones in there, so you'll be hearing about that. I actually just got the Sacai jacket myself yesterday. It is selling out, so for those who are interested, you better get after it.
I think the other piece on brand heat, one of our real exciting moments that's happening today is happening in Asia. We did a global campaign with ROSÉ, launched at the Super Bowl. She was part of our Behind Every Original. That has now manifested as a partnership in Asia, a collaboration. We're doing pop-ups. When you see these pop-ups happening, there are literally thousands of people in line to see ROSÉ. It has been a tailwind to how we're getting the overall results of, like I said, Asia overall 10%, China up 13%, and our women's business in Asia is even higher than that, all driven by this ROSÉ momentum. Stay tuned. Lots to come.
Thanks. Harmit, again, best of luck. Thanks for everything.
Thanks, Bob.
Thank you. Our next question comes from the line of Kendall Toscano of Bank of America. Please go ahead, Kendall.
Hi. Thanks for taking my question. Harmit, congrats on the retirement.
Thank you.
Just wanted to ask about the. You talked about greater than expected complexity in the U.S. distribution network transition in the U.S. and just curious, how should we think about this in light of what was supposed to be an immediate $5 million in cost savings per quarter as soon as you shut these parallel DCs down in Q4? It sounds like we now shouldn't expect to see any benefits until 2027, but any visibility on when in 2027 and what besides the fire that you called out has been more challenging than you anticipated?
Sure, Kendall, I can take this one. I'll first say that we are disappointed more than anyone that this transition has taken as long as it has, and it's been more complex. As we've ramped this up with our partner, we do have a complex business given the number of SKUs we have, the number of channels, the number of customers. We will get there, it's just taking more time. We did mention the fire that happened towards the end of the quarter, which just was a big disruption in some of our most important weeks. It was what it was. The team recovered fine. So, I guess we're just being patient and realistic in terms of when we will see the benefits. I do think a very important milestone that we achieved was closing our parallel Hebron facility.
We close at the end of Q3. With this behind us, we truly can begin to see the benefits in 2027 because we will not have that running. As it relates to Q4, I'd say, as Harmit was speaking to earlier, the good news is we do have a lot of demand from both channels. So we need to make sure that Groveport is set up to fulfill the demand. That's why we're making some investments along with our partner to ensure that we get the productivity, we get the service levels, we get the inventory right, and then over time, get that cost efficiency. So, we believe, we're confident we will begin to see that in 2027. We're not guiding 2027. We'll talk about that more. But we believe that 2026, let's call it the peak of what has been our transition-related cost, relative to this.
The last thing I would leave you on is that, the proof point for us is we did complete a complex transition in Europe, and that took some time. That's now behind us. You are seeing the EBIT performance and benefits of that. So that does give us confidence that we will get behind this. I think 2027 is very reasonable and realistic to start seeing the benefits. Like I said, closing that Hebron facility was an important milestone to say we have the confidence that Groveport will fulfill our needs. Now we're working through the operational complexities there.
Thank you.
Thanks.
Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo. Your line is open, Ike.
Hey. Good afternoon, everyone. Harmit, best of luck. We'll miss you. Been a pleasure working with you.
Thank you.
I will ask just two questions. On the 4Q guide relative to three months ago, is there any change on the revenue guide? It looks like it is a little lower than the implied before, but I just want to sanity check that to you guys. On the reinvestment of the refund on gross margin, Harmit, can you just be a little bit more specific? What exactly are you guys doing, and why is that not a drag that we need to think about that potentially kind of lingers into 4Q or the first half of next year? Just more the mechanics there. Thanks.
Yeah. I think, Ike, on the revenue, it is a little lower than the implied guide for Q4 because we guide the following quarter and the full-year. it is largely driven by foreign exchange. So reported, I think consensus is about 4.1, and this implies, I think we are saying three. Foreign exchange is 100 basis point drag from that perspective. That is your question on revenue. The question on what are we doing in gross margins, we are doing a couple of things. We could have taken pricing down. We could have. That was just one of the levers when the tariffs happened. It was not the only lever in the U.S. We had a couple of other pieces, but as I said earlier, we looked at the price value, and I think our current price has sustained that long term.
Given the environment is a little bit more promotional at this stage, we are really targeting promotions on key holiday moments. That is how we are thinking about it. Think Labor Day, with Thanksgiving coming up, with holiday, that is where we are thinking about it. To your point about why shouldn't this last. Also, I think Michelle said we did not have the right offer in the quarter, so we had to do this. Given the fact that we strongly believe that working with our product teams and the marketing team, that we do have a great offer for holiday. Michelle talked about sweaters and the like, and you will see that in our stores. I think that coupled with our execution, we believe, the promotional aspect of our offers will probably not sustain itself. I think Matt asked the question about gross margin.
We feel good at this time, continuing to grow gross margins, in 2027.
Thank you.
Thanks, Ike.
Thank you. Our next question comes from the line of Brooke Roach of Goldman Sachs. Please go ahead, Brooke.
Good afternoon. Thank you for taking our question. Harmit, you mentioned three areas of reinvestment of the tariff refund, supply chain marketing, and sharper value on promotions. Can you quantify the proportion of investment that you're putting towards each bucket, and if any of these investments will lead to payoffs in the business in 2027 beyond, versus the investments that are just driving immediate impacts to your business?
Then maybe a follow-up for Michelle. Given the enhanced marketing as a percent of sales this year, how are you thinking philosophically about the opportunity to potentially reinvest at a higher marketing spend rate over the next several years, similar to what we've seen other companies do in the branded space?
To answer your question, Brooke, the simplistic way, let's say we deployed $60 million out of the $80 odd million from tariffs that we received. I would say a third is marketing, a third is distribution and logistics, and a third is promotional activities. A little bit, we did clear some inventory just to make sure we're clean, and we have inventory for the holiday. That's the simplest way of looking at it. In Q3, the majority was promotions, a little bit of advertising, a little bit of inventory clearance. In Q4 is largely advertising, marketing, distribution, and slight promotions. Now, to Ike's question, the promotional activities we ramped up in Q3 are going to be ramped down in Q4, largely because we've got better product and we've got better marketing. Does that answer your question, Brooke?
Yes. Helpful. Thank you.
Okay.
Brooke, I can take part two. I think your question is, to me, how should we think about our bridge between, say, Harmit mentioned it earlier, we are at 9% in 2023. We have just guided around 12%, and we are still committed to the 15%. Our line of sight there is that we see opportunity in driving store four-wall profitability. We see leverage opportunity based on the volume, how we think about corporate expense and the like. We do see an opportunity for D&L improving over time. We did not see it this year. We think it is the peak. All of those things and a few more, we see as gross margin, another one. We expect to continue to elevate the brand and get gross margin gains. Those will all be tailwinds between now and put a date out there to get 15%.
Along the way, from a marketing standpoint, our intent is, over time, to invest more in the brand. Now we are at roughly 7%, a little bit more than that. I am not going to put a precise number, but if we continue to get good returns on marketing, we will find a way to fund that. That is how we are thinking about it, in the context of our commitment to all of you to get to that 15% EBIT. We will be obviously on our next call talking about how we are thinking about 2027 in that context. I would say stay tuned. I think that was the last question. Thank you, everyone, for listening. I guess I am going to make just one reiteration that as we think about our business heading into the fourth quarter, we have said it already, the trends are positive.
DTC is running at at least a mid-single-digit rate. We feel confident for the balance of the year, and want to wish everyone a great holiday, and we will see you in January. Thank you.
Thank you. This concludes today's conference call. Thank you for your participation. Please disconnect your lines at this time.