Earnings Call: Q2 2021

Jul 8, 2021

Ladies and gentlemen, and welcome to Levi Strauss and Company Second Quarter Earnings Conference Call for the period ending May 30, 2021. All parties will be in a listen only mode until the question and answer session, at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available 2 hours after the completion of this call through July 15, 2021, 1 week after call for telephone replay. Please use the conference ID 3,784,584. This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com. I would now like to turn the call over to Ida Orphan, Senior Director, Shareholder Relations at Levi Strauss and Company. Thank you for joining us on the call today to discuss the results for our 2nd fiscal quarter of 2021. Joining me on today's call are Chip Berg, President and CEO of Levi Strauss and Harmit Singh, our CFO. We have posted complete Q2 financial results in our earnings release on our IR We would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those Contemplated by our forward looking statements. Please review our filings with the SEC, in particular, the Risk Factors section of the quarterly report on Form 10 Q that we filed today for the factors that could cause our results to differ. Also note that the forward looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss certain non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in earnings release on our IR website. These non GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety 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 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn over the call to Chip. Thanks, Ida, and good afternoon, everyone. Our 2nd quarter performance was better than we expected, reflecting broad based strength across our business As we continue to see recovery from the pandemic, our results reflect the enduring power of our brand in a time when consumers are seeking out authenticity from companies that reflect their own values. In addition to seeing strong denim and casualization trends, We are also benefiting from the ongoing execution of our strategic initiatives and we are excited to see consumers returning to our stores as markets reopen with sequentially improving traffic trends. While the pandemic continues to impact our business, we are encouraged by accelerated revenue in the quarter with all regions and channels growing versus prior year. And compared to Q2 2019 reported revenues are down only 3 points. The recovery was led by the U. S. And sales exceeded Q2 2019 levels in more than 10 markets across the globe, including China. For the Q3 in a row, we delivered a record gross margin, which led to our highest second quarter adjusted EBIT margin ever, despite continued investments behind advertising and our growth initiatives. As we look ahead, we are confident the strength of our business will continue. In fact, we are now expecting growth versus 2019 levels 1 quarter earlier than previously anticipated with better structural economics. Let me share a few highlights from the Q2. Demand for our brands remain strong globally. Our men's bottoms business continues to gain traction and has nearly returned to pre pandemic levels. And our women's bottoms Business has now exceeded Q2 2019 revenue, up 9%. The looser fits that we launched pre pandemic are continuing to drive growth and increase as a percent of both men's and women's bottoms assortments now representing nearly half of each. We launched our multi platform global marketing campaign Buy Better, Wear Longer. We partnered with leading influencers and change makers Like Jaden Smith, Emma Chamberlain, Marcus Rashford and more to raise awareness and be voices for change in implementing more environmentally sustainable apparel production and consumption methods. Reaction to the campaign has been overwhelmingly positive, generating strong growth in our average daily brand mentions across global social platforms and a significant lift in brand consideration and purchase intent after consumers experienced and engaged with the campaign ad. Building off the success of our 501 Live series, The Levi's brand through a global virtual festival on May 20 to celebrate the birthday of the Levi's 501 gene, which has provided effortless cool style to working men and women, rock stars and everyone in between for decades. Broadcast around the world from our official Levi's Instagram account, the festival featured musical performances, meaningful conversations and do it yourself denim personalization and repair sessions with in house tailors. The celebration resulted in hundreds of PR stories and generated $4,000,000,000 impressions. And we continue to bring energy to the market through a number of exciting high profile collaborations with Valentino, Miu Miu and Denim Tears yielding strong self brews and elevating the brand with distribution and premium doors and features across leading publications. In our DTC channel, we've continued to accelerate our omni channel capabilities to ensure that our consumers can get product wherever and whenever they choose. Our company operated e commerce business grew 42 on a reported basis, a great result considering we're lapping strong growth in the prior year. We were particularly pleased that the growth rate remains Strong even as brick and mortar stores reopened in the Q2. We're investing in leading technology and expanding our fulfillment capabilities and earlier this month, Our largest distribution center in Henderson, Nevada became our 1st owned and operated facility to fulfill orders for e commerce, Retail and wholesale channels. Over time, we expect to increasingly leverage our own DCs to fulfill e commerce orders, which will drive more agility and inventory positioning, reduce lead times and accelerate expansion of e commerce margins. To ensure a seamless and frictionless experience across all channels, we continue to invest in our omnichannel capabilities. In the U. S. Demand served by ship from store grew versus 2020. Internationally, we continue to expand ship from store in Europe, Successfully launching in Belgium, the Netherlands, France, Spain and Denmark. We're now accepting PayPal and Venmo in all of our U. S. Stores as it extends our reach, especially for Gen Z. We've implemented pivotal improvements to our buy online, pickup in store program, Like the Shop the Store function and we saw an increase in both this volume and higher units per transaction after it was launched on the site. Shop the store is expected to launch on our app in Q3. We continue to look for ways to enhance the consumer experience and have made Easily return merchandise at more than 2,500 drop off locations within the U. S. Physical stores remain an important part of our business As traffic to our stores continues to increase, conversion in AURs remain strong and we're seeing better full price sell throughs. As store productivity levels continue to recover, we are confident in the outlook of our DTC business and we will continue to invest in growing all segments of this channel. We also remain focused on diversifying our business. Lapping one of the most unusual quarters in our history, all regions, channels and categories grew significantly versus last year. The U. S. Was by far our strongest market this quarter with growth of 4% versus Q2 2019 on strong wholesale and e commerce performance. And China returned to growth compared to 2019. As one of our largest growth opportunities, we remain focused on maintaining this momentum. In Europe, It's clear that consumer demand for the brand remains strong. As was the case last fall, when Europe reopened in May, Revenues bounced back quickly and posted strong growth versus 2019. Our global wholesale business neared 2019 levels and is much more profitable with a higher share of digital. Our wholesale strategy is working and we saw robust results in the U. S, which saw sales up versus 2019. Demand for our premium products remain strong and we continue to expand that business with premium retailers, including Nordstrom, where our men's and women's products can now be found in all stores. Our other Stockers, Signature and Denizen all had strong quarters. Stockers grew over 100% versus Q2 2020 with a much higher gross margin. And the Signature brand even exceeded Q2 2019 by nearly 30% Due to success with Walmart and continued expansion on Amazon with Signature Gold, we're using digital data and AI to dramatically improve Consumer experience and deepen connections leveraging every touch point to better connect and engage our fans. We will continue to deliver compelling consumer experiences digitally. We just launched our global TikTok Channel, which generated more than 100,000,000 views in the 1st 6 weeks since its launch, and we held our first Shoppable livestream event on levi.com in the beginning of June. Through data and AI capabilities, we've created a more cohesive and personalized consumer experience on our app and with our loyalty program. Our app continues to exceed expectations with a 20 increase in downloads compared to Q1. We're also seeing increases in average order values sequentially and the op contribution to e commerce revenue continues to increase. And in our loyalty program, consumer lifetime value of members remained substantially higher than for non members as is units per transaction. In terms of digitizing our own business, We are transforming the way in which we plan with AI now forecasting initial demand for each product next season. Results from our 1st wave test showed that AI driven demand forecasting improved accuracy. So scaling it should enable more precise inventory lead to less markdowns and clearance, prevent waste and enhance sustainability, all of which will improve our margins. This will be powerful in combination with the ongoing work AI has been contributing to pricing and promotion. Before I turn it over to Harmit, We know that in order to thrive in a digital first future, we need to invest not only in technology, but in our people. This quarter, we launched a digital upskilling initiative, which included the industry's 1st machine learning bootcamp, an immersive training in coding, Machine Learning and Agile ways of working, uniquely designed for Ellison Co. Employees. After graduation, these practitioners, Now data scientists return to the business to apply their skills and create momentum around our digital agenda. By the end of the year, we will have upscaled more than 100 employees globally. Let me now hand it over to Harmit for a review of our Q2 financials and our guidance outlook. Harmit? Thanks, Chip. Good afternoon, everyone. I hope all of you, your families and loved ones are returning back to the new norm. As economies recover, the vaccination pace Accelerates globally and consumer demand for apparel improves. The momentum of our business continues to accelerate as we significantly outperform our revenue and profit expectations in the quarter. The structural economics of our business has sustainably improved versus 2019 and I'm confident of achieving our adjusted EBIT margin target of 12% plus. I'll share more on guidance in a few moments, but we are thrilled that the recovery is happening faster than we thought, and we are now poised to deliver total company growth versus 2019 in quarter 3, a full quarter earlier than previous expected and that even before we are firing on all cylinders, given store traffic and tourism have not yet fully recovered. As I walk you Through our Q2 results, my comments will reference constant currency comparisons on a year over year basis in U. S. Dollars, unless I indicate otherwise. Where meaningful, I will also share comparisons to 2019. 2nd quarter net revenues of $1,300,000,000 grew 148% compared to Q2 2020 And adjusted diluted earnings per share was $0.23 both exceeding our guidance. Compared to Q2 of 2019, constant currency revenues were down only 4%, a sequential improvement in sales, And adjusted diluted EPS was significantly ahead of 2019, driven by improved structure Economics of the business. Let me share some color on the detail. Despite an increasing number of markets Our e commerce business, which represents 8% of our total revenues, grew 37% in the 2nd quarter Compared to prior year, we are really pleased with this given we are lapping strong growth. Compared to Q2 2019, our e commerce business has grown 71%. Total digital ecosystem sales growth also accelerated to 68% over prior year and represented 23% of sales in quarter 2. And compared to Q2 2019, Our total digital business has nearly doubled. DTC brick and mortar is still recovering given many markets have not fully reopened. We are seeing traffic return and importantly, our key performance metrics at retail remains strong. Compared to quarter 2, 2019, global wholesale was down only 2% and U. S. Wholesale was up by 6%. Importantly, U. S. Wholesale gross margin and profitability is the strongest it's been in a while. Our 2nd quarter adjusted EBIT was $115,000,000 and our 9% adjusted EBIT margin was a 2nd quarter record Hi, despite higher advertising as a percentage of revenues showcasing our record gross margins. Relative to 2019, reported adjusted EBIT margins were up 280 basis points. Record adjusted gross margin of 58.2% represented a 670 basis points expansion compared to Q2 2020. AURs grew across channels, genders, products and regions. Compared to Q2 2019, gross margin expanded 490 basis points. The bulk of the increase for both comparisons was driven by several sustainable attributes, including A higher proportion of sales from our DTC channel, the price increases we have taken across all channels and a number of geographies, A higher share of women, which now has sustainably higher gross margins than men and COGS savings from a globally diversified The quarter's gross margin expansion also reflected some other temporary benefits across all channels, including wholesale, like a higher share of denim's bottoms, lower levels of promotions and other off price selling, which collectively amounted to roughly 100 basis points of benefit to gross margin. These benefited in the quarter to a higher degree than we previously anticipated. To reinforce, the majority of Factors driving margin expansion are structural and sustainable. DDC sales, both brick and mortar and digital, have our highest gross margins, and our strategies will drive DTC to a higher percentage of our total business in the years ahead. It is also pertinent to note that even after the price increases we have taken, both in the past and for the second half of twenty twenty one, We still have pricing power to not only offset cost inflation, but to also improve our gross margins as well. Importantly, we have negotiated most of our product costs through the first half of twenty twenty two at very low single digit inflation. Adjusted SG and A was 628,000,000 Excluding an unfavorable currency impact of approximately $8,000,000 adjusted SG and A was in line with Q2 2019. This is despite higher incentive as we are exceeding our expectations and higher ROI growth investments towards advertising, DDC, AI and technology as those increases were funded by savings that we have actioned last year. Now I'll share a few highlights from our 3 regions. 2nd quarter revenue in the Americas increased 150% compared to prior year. Compared to the Q2 of 2019, Americas revenue grew 4%, led by wholesale and digital. Expansion of wholesale gross margin underscores the healthier business we have built In the region, versus Q2 2019, company e commerce grew 51% and the full digital ecosystem grew 61% and represented nearly 20% of sales. Total revenues from brick and mortar stores in the region nearly reached 2019 levels, despite the significant impact of tourism not having yet recovered. And the region's operating income was $153,000,000 up 52% against the Q2 of 2019, reflecting substantially stronger gross margin and ongoing cost controls. Within the Americas region, the U. S. Business is structurally a lot stronger today than it was pre pandemic for several reasons. It has a larger digital business, a higher share of revenues with financially healthier and more premium customers, More full price sales, pricing power and a higher retail productivity, especially critical as we open more full price stores. We are confident we can continue to grow the U. S. Business over the long term. Turning to Europe, revenues increased 165% versus 2020, reflecting strong demand as markets in the region reopen. Compared to the Q2 of 2019, Europe's revenues were down 12% as direct to consumer, brick and mortar and franchise remain down, given more than a third of those were closed during the quarter. These declines were partially offset by growth in our e commerce business and digital wholesale. Company grew 80% compared to 2019, while the full digital ecosystem in Europe has doubled and now represents over a third of the region's sales. Importantly, Europe exited the quarter with revenue in May growing high single digit compared to May 2019. Operating margin has expanded 80 basis points since Q2 2019, despite the sales decline reflecting higher gross margin and cost discipline. Asia revenues grew 113% compared to prior year. Compared to the Q2 of 2019, Asia's revenues were down 13% as the pandemic continued to negatively impact several of our significant markets, We roughly half the decline in the region attributable to India. But we are seeing growth in several important And continuing growth in digital, fueling our optimism. China grew 3% versus Q2 2019, reflecting double digit growth in our direct to consumer store network in e commerce, which we expect to continue into the second half. Our markets in Australia and New Zealand were another bright spot, up strong double digits from Q2 2019. And company e commerce doubled in size from Q2 2019, while over the same time period, The full digital ecosystem in Asia grew 79% and now represents 15% of the region's sales. Turning to balance sheet and cash flows. Inventories at the end of the quarter were 12% below prior year, essentially driven by double digit declines in both Americas and Asia. Inventories remain healthy and primarily comprised of products that can carry into future seasons. Compared to the end of the Q2 of 2019, Inventories were down 4%. Cash and liquidity remained strong, and at the end of the quarter, net debt was negative $46,000,000 and overall liquidity was $2,000,000,000 Adjusted free cash flow through the first half of the year was $60,000,000 representing a 54% improvement versus the comparable period of 2019. And we continue to return cash to our shareholders. I'm pleased to announce that we are again raising the dividend to $0.08 per share for the 3rd quarter, up from $0.06 per share and in line with pre pandemic levels. Before sharing our second half Let me take a moment to provide an update on our sales performance through June. As a reminder, to improve comparability with Calendar reporting companies have decided to indicate revenue performance to calendar quarters when relevant. For the 3 month period of April through June, revenues were up low single digits to the comparable period of 2019 On a reported basis, with the month of June up mid to high single digits compared to June 2019. Now turning to the outlook for the second half and full year 2021. Given the structural and sustainable improvement in the business and the momentum headed into the second half, We expect a much stronger full year in both revenue and EPS than previously anticipated. We expect reported revenues for the second half of twenty twenty one to grow 28% to 29% versus second half twenty twenty. This equates to reported revenue growth of 4% to 5% versus second half twenty nineteen, which includes a currency benefit of 2 points. From a regional perspective, relative to 2019, we expect second half Reported revenues to grow in the Americas by mid single digits and in Europe by high single to low double digits. Asia, despite strong growth in China, will still be below 2019 due to the ongoing prevalence of the pandemic there. From a quarterly perspective, we expect ongoing sequential improvement in our quarterly growth rate versus 2019, with Q3 growth below and Q4 above our second half growth rate. In terms of profits, we expect second half adjusted EBIT margin of 12 And we expect to deliver adjusted diluted EPS of $0.72 to $0.76 in the second half, which will bring us to $1.29 to $1.33 for the full year. Compared to 2019, this equates to second half EPS growth of more than 26% and full year growth of more than 15%. A few color comments on our key second half assumptions beyond revenue. We expect the second half gross margin in the range of mid-fifty 6 percent, an increase of nearly 300 basis points above second half twenty nineteen. As per usual, we expect sequential quarterly improvement in gross margin, so Q3 lower and Q4 higher than the second half average. With the strong second half gross margin outlook, Combined with our Q2 gross margin outperformance, we now expect a full year gross margin of around 57%, higher than our prior expectation of 56% and more than 300 basis points above full year 2019. And we are increasing our investment in adjusted SG and A. 2nd half adjusted SG and A will be about $100,000,000 higher than it was in the second half twenty nineteen. About $30,000,000 to $35,000,000 reflects our estimate for unfavorable currency effects from a weaker U. S. Dollar. The remaining $65,000,000 to $70,000,000 splits roughly equally between advertising and selling. We are increasing our advertising investment to drive our initiatives and market share goals as we fuel and elevate our brand. We expect second half advertising dollars as 7.7 percent of second half revenue. This is 70 basis points higher than second half twenty nineteen. And we'll also have higher Selling and variable expenses related to raising our second half revenue outlook, which is largely comprised of DTC revenues. The incremental adjusted SG and A will support accelerating profitable growth without impacting our adjusted EBIT margin target given the associated higher gross margin and leverage from higher revenues. And finally, with respect to taxes, Given the significant tax benefit we recorded in the Q2, we now expect a lower full year tax rate of around 10% or 11%. This implies a second half tax rate in the very low teens. Before we go to Q and A, I'd like to leave you with 3 key thoughts. 1st, We beat our 2nd quarter expectations and are raising our full year outlook. Achieving this will result In our full year revenues nearly approaching 2019 levels with second half adjusted EBIT margin tracking 12% and full year adjusted diluted EPS substantially higher than 2019. And we're getting to the improved profitability in a high quality way with higher revenue, gross margin and disciplined cost management. 2nd, structurally, our business is stronger than it was in 2019, driven by a higher share of digital revenues, a healthier U. S. Wholesale business and technology investments that have accelerated our DTC business, while connecting us directly with more consumers. Over the past 2 years, we have reshaped our P and L with higher sustainable gross margins and cost cuts, which are fueling our A and P and other growth investments while delivering higher adjusted EBIT margin. This gives us great confidence to continue market leadership growth driven by the strength of our brand and our products, especially as denim resurges and casualization trends accelerate. We remain confident that we will deliver full year adjusted EBIT margin of 12% plus in 2022. And third, We have a very strong balance sheet with net debt below 0. We've driven this through our renewed focus on cash, which has improved our cash conversion cycle significantly as compared to 2019. As a result, we continue to have With that, we'll take your questions. Thank you. We ask that you please ask one question, then return to the queue. Please standby while we compile the Q and A roster. Our first question comes from the line of Matthew Boss of JPMorgan. Your line is open. Thanks and congrats on another great quarter. Thanks Matt. So maybe Chip, in light of the global momentum, Could you elaborate on current trends in the denim category and just your confidence in sustainability of this strength as we think about pent up demand? I know you've talked about size profile changes, maybe that relative to the fashion and silhouette Fit drivers of a potential multiyear denim cycle that I think you coined first on last call. Yes. Well, I think with 1 more quarter underneath our belt, I think we are we can confidently Say that we're in the early innings of a new denim cycle. I've got a lot of confidence in the sustainability and our ability To continue the momentum that we've seen through this quarter, the strong results reflect an industry wide denim resurgence. It is being driven by several things. One is the continuation of the casualization trend. And I would say that that's occurring more on a global basis than just inside the U. S. As the pandemic fog lifts And more people get vaccinated to return to social activities as lockdowns lift. People are now starting to go back to the office in many parts of the world. All of this creates a new wardrobe opportunity. And I have talked about the fact that this is U. S. But about 35% of consumers in the U. S. Have changed waste sizes. And some of it is up and some of it is down, but either way it creates another reason for people to go out and update their wardrobe. But importantly, I do think the new silhouettes, which we've led, actually before the pandemic, we launched our first Kind of baggy fits and it really took hold and then as the pandemic kind of started to happen, We just kept doubling down on it from 1 season to the next, but we are seeing on both the men's and women's business But these are big drivers of our business. The looser baggier fits are almost half of both men's and women's Sales this past quarter, and that's a pretty significant change, especially on women's from Q2 2 years ago. And as bottom silhouette changes, it also has an impact on tops, it has an impact on footwear, And it really does present an opportunity to update people's wardrobes broadly beyond just the denim bottoms. On top of all that, we've also talked about the importance of extending beyond denim and we saw really good results there. Some of our newer styles such as the XX Chino, that was up 2 46% and our shorts offerings are up. On the women's business, we've seen really good results on dresses, and that has also helped quite a bit this past quarter. So I think we are in the early innings of a new denim cycle driven by this new silhouette. That's kind of a throwback to the early 90s. I think it is fundamentally being driven by the casualization trend And it gives me a great deal of confidence as we go forward into the next couple of quarters. Great. Congrats again. Thanks, Matt. Thank you. Our next question comes from Bob Drbul of Guggenheim Securities. Your question, please. Hi, thanks. Good evening, guys. Hope you guys are well. A couple of questions really. Chip, I guess, can we talk a little bit about pricing, just if you could elaborate on pricing? Are they sticking? Are the recent pricing actions Sticking, how much pricing are you taking in the second half? And can you really just talk to like the sustainability of these price increases and how you guys are approaching it? Thanks. Hey, Harmit, you're on mute, I think. I think Harmit wants to answer your question. There we go. So Bob, on pricing, as we've said in the past, we are in the early innings of pricing. We've been more proactive on the back of a brand being hot and our products Being relevant as Chip talked about, our view is you take pricing when The brand is resonating with the consumers, not when you need to. And we have taken pricing during the pandemic. It's ticking. If you look at our first half, pricing probably helped about a point on revenue And we think of the quarter, about quarter 2 pricing was about a point of gross margins. Thinking forward, The other piece is Chip talked about the loser baggier fit. They are higher AURs, they are better gross margins. I talked about our women's Piece of the business which are underpenetrated and growing, that has higher gross margins because we did take some pricing last year, especially in the U. S. Relevant to wholesale. So the other piece in the pricing bucket Is the reduction in markdowns. We are using AI data analytics as well as with lean inventories that's making sure That our products are marked down appropriately, that's definitely helping AUR. As you think of AUR generally Across the system, in quarter 2, they were up about 5%. And it's across geographies, across channels. So our view is That pricing is ticking. We're also prepared for any cost inflation if it happens. I talked about The fact that we've been able to negotiate our H1 cost of goods at very low single digit inflation, which is a little higher relative to the previous years, but we're more than prepared for inflation if it comes down That part. And I think the other piece is, if you think of the industry, prices have largely been deflationary over the last 2 decades. And as market leaders, when denim is resurging, I think it's an opportunity to lead the industry. Great. Thank you very much. Thank you. Our next question comes from Jay Sole of UBS. Your line is open. Hi, good afternoon. This is Mauricio Serna on behalf of J. Soul. I wanted to ask about Europe, you mentioned that sales in May improved versus May 2019. I think I heard like up double digits. So Just want to understand how that number improves throughout the quarter? And sorry, if you could also like Say it again, what you're seeing for the Q3 by region? That will be very helpful. Thank you. Sure. Pre pandemic, Europe was our strongest market. We were market leaders by Executing really well, growing double digit. Before the last resurgence, The recovery in Europe was also the strongest. And unfortunately, Countries had to go into lockdowns. And so during the quarter, about a third of our stores were closed in Europe. As we exit the quarter, A lot of them have reopened. So when we talked about exiting the quarter, we talked about May Sales in Europe being, I believe, in the high single digit. If you take a market like the UK, which where retailers open, We have seen, if you take the last 2 months, we've seen double digit increase in sales. So there is the brand is very strong and is largely The performance has been light only because stores have been closed. The European team has done a great job also pivoting To making the business more digital, so I talked about the company e commerce business in the quarter growing close to a little over 90% And the full digital ecosystem becoming a third of the business. So our view of the world is it's difficult to predict When and how lockdowns happen, we all heard about Japan this morning, but our view of the world is our Execution capability of our teams on the ground are focused on driving agility on the back of The consumer and employees being safe and we're able to recover pretty quickly. And so that's how we're thinking about Europe and other parts of the world Over the next 12 to 18 months. Great. Thank you. Thank you. Our next question comes from Laurent Vasilescu of Sainte BNP Paribas. Your line is open. Good afternoon. Thanks for taking my question. Hermie, I think you've mentioned that June is up mid to high single digits. And then if I remember correctly on the 2H guide, which I think implies on 2 year stack, it's 4% to 5%, but that 3Q would be a slower growth rate. Just trying to square away, how do we think about June? It sounds like June would be the driver and then there's a sequential slowdown. Just trying to understand the mechanics here. And then any thoughts On updated thoughts on the Target partnership as we headed to back to school would be very helpful. Thank you very much. Great. I'll take the June and the second half question and then I'll pass on the second question on targeted chip. But to your question, June was a good indication of what happens when lockdowns lift. And what we are seeing is consumers come back and come back especially to brands That has relevant products as well as brands they can trust. And you're right, the numbers in June were pretty strong. But we also feel part of that is pent up demand, part of that is people getting back to the new norm. So as you think of the second half of the year, Our expectation clearly higher than a quarter ago, clearly reinforcing that We not only returned to growth relative to 2019, but we get to growth in Q3, which is a quarter ahead of our expectations. So that's how we're thinking about it. The other piece to note is there are various parts of the world that are still closed. I mean, Asia and I just referenced Japan today, We have not won the battle against the virus yet. There is still Work to be done on that front. And so it's important to ensure that that's incorporated In our outlook, as we think about the next 6 months. Yes. And on target, Laurent, The headline thought is we continue to be really happy with that relationship. And I think if you were to ask them, they would say the same thing. We're currently in about 300 doors with Levi's Red Tab and about another almost 1500 doors with Denizen. We are expanding the 500 target doors in time for back to school. So that is already in motion. So our Q3 results will include some distribution expansion of Levi's Red Tab to 500 Target Doors. And then on top of that and most of those doors We'll also have Denizen and then Denizen will be exclusively in another 1275 or so doors. So total target distribution of about 1775 stores or so, but we will be expanding Levi's Red Tab to the 500 Target doors in time for back to school. Great to hear. Thank you very much. You bet. Thank you. Our next question comes from Paul Lejuez of Citigroup. Please go ahead. Thank you. It's Tracy Kogan filling in for Paul. I was wondering if you guys could update us on any Supply chain issues you're currently seeing and maybe if supply chain issues have affected your inventory levels or constrains your demand and when you think It might improve. Thanks. Yes. We have experienced some impacts, although I would also be very quick I would say that I think we are managing through this better than most. I would say the impact The order was about a half a point of growth for the total company, so kind of in the range of $7,000,000 to $8,000,000 in the quarter. Our expectation for the second half is there will continue to be challenges, but we're going to be air freighting more. That's already been to our gross margin guidance, which we've given. And we are Working around some of the biggest challenges, still a challenge in Long Beach. We're now shipping most of our product into the U. S. Through the East Coast, only about 20% of our U. S. Stream through the West Coast right now, and we've built the delays into our lead time. So We're fully expecting that we're going to be able to manage the back to school volume as that comes upon us and Holiday as well. The team has done really a great job of contracting and getting guaranteed space on vessels. A lot of people are talking about Not being able to get containers, not being able to get onto a ship, the team has done an extraordinary job on getting us guaranteed space, Guarantee pricing as well, which is helping us to control our costs. So, this is a big challenge for the industry. We're hearing it from a lot of our Customers, we are all over it. And I think we are in part because we've got such a diversified supply chain, I think we're managing through better than most. Great. Thanks very much. You bet. Thank you. Our next question comes from Dana Telsey of Telsey Advisory Group. Your line is open. Good afternoon and congratulations on the progress. Given the improvement in margin that you've seen, how do you think about the DTC margin, e commerce versus stores? Is there improvement being seen in each of those channels and how do you think about that going forward? And then just lastly, In terms of product inflation and raw material costs, how are you planning those going forward? Thank you. Thanks Dana and thank you for the insight on CNBC today. I'd say to your question on gross margin, DDC continues to be a tailwind. Our gross margin both in stores as well as e commerce is higher than the company average. And we have said Strategically, one of the pivots we made during the pandemic was that we will accelerate our direct to consumer Business, we're about 40% of the business today is great to consumer, but we hope to get it to about 60%. So That clearly helps our gross margins. We also as I talked earlier, we're selling a lot more full Price product, we are also being very thoughtful about And discipline about our promotions, all these factors will help. We're seeing an increase in AURs, I talked about, That's making a big difference. There is a piece in the gross margin side that I think Maybe temporary. I mean, it's small, but it's there. And we called it out. I think that's why gross margin in the second half, even though The 300 basis points higher than 2019 are slightly more moderated than the 670 or 500 This point to revenue 2019 that you've seen here. To your question about costs, given the scale that we have And given that we have wonderful partners and vendors around the world, we've been able to negotiate, I would say cost increase on product to very low single digit for the first half of twenty twenty two. And that gives us confidence about continuing or maintaining gross margin growth as we get into 2022. And we are seeing inflation in media costs, we're seeing inflation Fulfillment costs we're seeing inflation in media, but manageable from our perspective. And given that our brand has pricing power, if we ever need to Take more pricing that we think we can. Thank you. Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley. Your line is open. Okay, great. Harmit, I wanted to ask you about the gross margin, 57% full year gross margin this year, obviously a really exceptional accomplishment. I know you called out the 100 basis points of temporary benefits Here in the Q2 and I can't recall if you gave that in Q1. But if you could just take a look at the full year Out of that 57%, is there a 25 basis point or 50 basis point sort of Give back next year, I'm just wondering what the sustainable if we were to think about the more structural benefits you're delivering in gross margin this year versus Some of the temporary ones, if you could help us understand the breakdown within the 57% target this year, that would be great. Yes, definitely, we're not ready to give guidance For 2022, I'll talk about a growth algorithm because things are still stabilizing. But we feel good about ensuring that gross margin Continues to be accretive year over year. We demonstrated that even last year when we're in the heart of the pandemic. I think your question, Difficult to call out, Kimberly, but in this quarter, we felt probably there were temporary benefits of about 100 basis points, which annually, If you equate it by 20, 25 basis points, Chip referred to us A freighting product in the second half and we build it into our gross margin guidance. Our assumption is long term, We will revert back to the old norm of shipping the products, so we may not need to airfare as much. So there are some puts and takes As we think about the year, broadly, I think registering 3 quarters In conductive fashion, I recall gross margin just talks about how strong the brand is. And so that's what I would kind of leave you with is the thinking that we'll probably continue to grow gross margin annually. How much That will be, I'll probably talk to you more in a couple of months, maybe early next year when you talk about 2022. I think the broader perspective also is, our confidence of delivering a 12% EBIT margin or operating margin and growing from there beginning 2022. So I think I'd say Our view of the world is gross margin continues to be accretive. We continue to invest on things that matter, A and P, etcetera, But that doesn't drive leverage and improve operating margins. Very clear. Thank you so much. Thanks, Kimberly. Thank you. Our next question comes from Lorraine Hutchinson of Bank of America. Your question, please. Thanks. Good afternoon. I have a question about how you're thinking about future orders And how are you trying to strike a balance between meeting the outsized demand that you're seeing, particularly in some of these new fashion items and tops With maintaining all this progress you've made on gross margin, so where are you coming out in terms of Planning your production and your inventory levels for the coming seasons? Yes. We're doing a few things structurally that will continue to improve our inventory management. We're moving from 2 seasons to 4. Chip talked about implementing AI driven demand forecasting that leads to better inventory management, But also ensuring that we minimize the miss on sales. So there are quite a few things. The The other thing that we're doing is we are raising the percentage of common assortments around the world Because it allows us to move inventory between countries and between affiliates. The other muscle that we have built Is the muscle of chasing, thanks to the wonderful work of our supply chain folks and operators on the ground. Now, I think we can chase more into demand as against ordering everything and keeping it. So that leads to better inventory management And obviously lower markdowns because you're not necessarily buying product before you see those trends. And so the way we think about Inventory levels, Lorraine, I think the 12% decline that you've seen is not here to stay. We probably Have inventory at par in Q3 and as we start planning 2022, Inventory levels will probably be slightly higher, mid to high single digit. But the good news for us is, as you've seen even during the pandemic, 2 thirds of our inventory is core or what we can sell from season to season. So, our view of the world is that We will have inventory that will allow us to grow this business. We'll probably be chasing if the recovery continues at the pace it is, We'll probably be chasing demand and that's not a place a bad place to be. Chip has said a couple of times, we'd rather Lose the sales and have a lot more inventory that we'll have to mark down. Thank you. Thank you. Our next question comes from Carla Casella of JPMorgan. Your question please. Hi. I'm curious, you mentioned that ladies has a higher gross margin at this point. And I'm wondering what's that attributable to? Is it the mix Or something else. I'd say a couple of things, Carla. In the good old days where We were not growing women's. It was dilutive to all company margins. Then we introduced Wonderful women's product and had, I don't know, 15 quarters of double digit growth. So the product is relevant. It was resonating with her. And then we continue to innovate, introduce new styles, we took pricing. We had the volume And we leveraged the volume to drive better cost of goods sold. So all those factors have really contributed to higher Gross margins for our women business is under penetrated, so we think this will grow. And I think as it grows, it continues to be accretive. And so we think the gross margins are sustainable as we continue to grow Our women's business, which today is about a third, a little over a third of our business. And we have stated publicly, Our intention is to grow this to at least half our total business over time. There are countries that do it Effectively today, I think Australia has a very has a women's business that's at par with the men's business and other markets in Europe, so I think it's clearly possible. Okay, great. And then can I ask just one on travel? Where would you say you are in terms of travel if you look at today versus pre pandemic? How much more upside is there as Travel reopens worldwide. Are you talking about travel as in travel expense? Sales, tourist sales. Oh, you're talking about tourist sales. I'd say tourist sales are Practically non existent, I think you've seen a little bit in Q2, but it's very small. If you think about our doors, what the Teams around the world are doing a wonderful job is reaching out to more local consumers. So I think and we are reaching out to a lot more younger consumers around the world to try and Around the world to try and offset some of the tourist decline, it's difficult to predict, but I'd say It's varied by country. Every country has a different rule for allowing tourists. You probably see Things get back to normal probably a year, a year and a half from now, but our view is that we're able to mitigate where we can. Okay. That's great. Thanks a lot. Yes. Thank you. At this time, I'd like to turn the call back over to President and CEO, Chip Berg, for closing remarks. All right. Well, thank you everyone for dialing in and for the terrific questions. We will look forward to speaking with you again at the end of our Q3. Thanks very much and enjoy the rest of your summer. This concludes today's conference call. Thank you for participating. You may now disconnect.