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Edited Transcript of LEVI earnings conference call or presentation 30-Jan-20 10:00pm GMT

Q4 2019 Levi Strauss & Co Earnings Call

San Francisco Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Levi Strauss & Co earnings conference call or presentation Thursday, January 30, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aida Orphan

Levi Strauss & Co. - Senior Director of IR & Risk Management

* Charles Victor Bergh

Levi Strauss & Co. - President, CEO & Director

* Harmit J. Singh

Levi Strauss & Co. - Executive VP & CFO

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Conference Call Participants

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* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Omar Regis Saad

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. fourth quarter and fiscal year 2019 earnings conference Call for the period ending November 24, 2019. (Operator Instructions) 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 February 5, 2020. Please use conference ID 2979134. 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 Aida Orphan, Senior Director, Investor Relations and Risk Management at Levi Strauss & Co.

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Aida Orphan, Levi Strauss & Co. - Senior Director of IR & Risk Management [2]

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Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year for 2019.

Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, our Executive Vice President and CFO. We have posted complete quarter 4 and full year financial results in our earnings release on our IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site.

We'd 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. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause the results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law.

During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

Finally, this call is in its entirety is being webcast on our IR website, and a replay of this call will be available on the website shortly. (Operator Instructions)

And now I'd like to turn over the call to Chip.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [3]

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Thanks, Aida. Good afternoon, everyone, and thank you for joining us today.

2019 was a historic year for the company. We returned to the public equity markets with our IPO last spring, maintained focus on what we could control in a challenging environment and executed against our objectives. We're pleased with the financial results we delivered and the progress we've made towards becoming a leading global lifestyle brand. The backbone of our success remains the strategic initiatives we've implemented to diversify our business by expanding our direct-to-consumer presence and growing internationally and across categories.

On the back of double-digit growth last year, we delivered revenues of $5.8 billion in 2019, up 3% on a reported basis and 6% in constant currency. And we did this despite facing several challenges, both expected and unexpected, not the least of which was having no benefit of the Black Friday week in the fourth quarter. That impact, in combination with our distributor acquisition in South America and the unrest in Hong Kong, caused the company a point of growth for the full year.

Growth was driven by diversification and included the following highlights, all in constant currency on a full year basis. Our growth internationally was broad-based, with Europe growing 13% and Asia, 10%. Direct-to-consumer grew 10%, and within that, e-commerce grew 18%, and women's and tops were particularly strong, each up 14% for the year. The Levi's brand had another strong year, maintaining its position at the center of culture and growing 7% for the year on the back of 13% the prior year. We continue to assert ourselves as the inventors of denim and the leader of the category, connecting with consumers through innovative shopping experiences, leading fits and styles and exciting new collaborations, all while redefining our industry.

Levi's continues to be the partner of choice for influencers, artists, iconic characters and technology companies alike. In 2019, we unveiled several diverse creative collaborations with partners, including Star Wars, Hello Kitty and Stranger Things. We worked with Nike to launch an exclusive in-demand collection of footwear, and we partnered with Google to create an improved version of Jacquard, our smart tracker that allows consumers to control their phone from the comfort of their jacket. In 2019, these collaborations delivered over 12 billion impressions globally, equating to roughly $100 million in media value.

Collaborations continue to generate brand heat as well as drive traffic and sales. And looking forward to 2020, you can expect to see the Levi's brand come to light with many more exciting, unexpected and innovative collaborations in the pipeline.

We continue to evolve the Levi's consumer experience to create deeper connections with our fans. We opened 6 next-gen stores globally across Europe and Asia in 2019. These stores amplify the Levi's brand and feature a redesigned storefront, tailor shops, updated fitting rooms and more.

As we exited the year, we launched our largest-ever pop-up in Miami, 45,000 square feet, which opened in conjunction with the launch of our Basel has been a hotspot this week in the run-up to the Super Bowl. The pop-up showcases the best of our brand and the future of retail, housing Levi's premium products, our largest and most innovative tailor shop, interact one-of-a-kind experiences, technical innovations and collaborations with well-known artists such as Shepard Fairey and Cey Adams. And just last night in Miami, we launched our global product campaign for the Levi's XX Chino, our new extra-comfort, extra-soft chino for men with Grammy-nominated artist Khalid as the global face of the campaign.

Speaking of Super Bowl, how about them Niners, our ROI from Levi's Stadium investment has been tremendously amplified behind the run this powerhouse team has been on. And with more than a decade to go, our stadium deal has been one of the best returning advertising investments we make in the U.S. and continues to be one of many vehicles that enable us to stay squarely at the center of culture.

I'll now walk you through our full year constant currency results in the context of our 3 where-to-place strategic choices, which are drive a profitable core, expand for more and become a leading world-class omnichannel retailer.

First, on our profitable core business, which comprises men's bottoms, our top 10 wholesale customers and our top 5 mature markets. We protected and grew our share leadership in men's bottoms. Levi's men's bottoms grew low single digits, while Dockers men's bottoms declined as we anniversaried a line reset in 2018. Our top 10 global wholesale customers collectively grew 2% despite a disrupted U.S. channel, and our top 5 mature markets grew 2%, within which the international markets were collectively up 10% and the U.S. was down 1% for the year.

We have several initiatives in place to strengthen performance in the U.S. market. We have the opportunity to expand distribution at wholesale and in direct-to-consumer and to premiumize the marketplace on the back of the strength of our brand by offering a broader assortment of our better and best products across both men's and women's in order to offset some of the macro trends we are seeing at wholesale. Initiatives in the U.S. wholesale channel include gaining share within the largest department store retailers through elevated product presentations and broadening our portfolio, incremental penetration in premium retailers and selectively adding distribution and enlarging our footprint in existing specialty and regional retailers. We are collaboratively managing our expanding digital business across pure play, wholesale.com and our own e-commerce site, and we are growing our presence with our partners in the mass channel. We believe these initiatives will support our aspiration to manage the U.S. wholesale business to flattish over time.

In our U.S. direct-to-consumer channel, we will open more mainline doors, leveraging the successful model we've deployed internationally, smaller footprint, more profitable, more capital-efficient stores in better locations. This will support our objective to increase distribution of our premium products in the U.S. marketplace. We are approaching expanding DTC brick-and-mortar distribution judiciously by testing a handful of stores in the U.S. this year. If the test has a high ROI, we'll expand that model. We're focused on optimizing execution of our strategies within -- in the U.S. with an objective to grow the marketplace over time despite fluctuations within U.S. wholesale on a quarter-to-quarter basis.

Our second strategy is to diversify the business by expanding for more, and this strategy continued to drive strong results. As I mentioned, our total women's business grew 14% in 2019, approaching $1.8 billion and 4 years in a row of double-digit growth. We continue to grow our market share in women's denim, including in the U.S. where we've overtaken the #2 position. We're driving trends and leading the category in innovation demonstrated by the rapid growth of our women's fashion fits, including high-rise styles like the rib cage and looser fitting bottoms, like our new balloon jean, which are really resonating with the consumer. We also have recently expanded our accessories line and ventured into new categories in women's, including bodywear. These are natural extensions of our brand in areas that offer us a long runway for growth in women's.

Our total tops business growth of 14%, also, its fourth year of double-digit growth, was driven by the success of a wide spectrum of tops, including tees, fleece, outerwear and trucker jackets. Each of our emerging markets of India, Russia and Brazil posted strong double-digit growth. And though modest at 2%, Mainland China is back to growth.

Our plan is to accelerate growth in Mainland China in 2020, and December was a very strong month, and then the virus had a significant impact to our business in January. It is really unfortunate how the outbreak of the recent virus has been impacting people's lives, especially during the Chinese New Year. We're taking this seriously and responsibly with our top priority being our people and our business partners. As a result, we temporarily closed roughly 50% of our fleet and have stopped all employee travel in and out of China. While this will put a damper on our growth in China in the near term, we are continuing to execute on our strategies there, and we will update you on the impact to our business when we provide our first quarter results.

As a reminder, Mainland China is still only 3% of our business. Our value brands, Signature and Denizen, grew mid-single digits in 2019 as we continue to offer great products at lower price points in the value market without cannibalizing the other parts of our business. Both brands improved gross margins and leverage their cost bases, improving profitability. Signature and Denizen, collectively, represent about 7% of our total business.

Our third where-to-place strategic choice is to become a leading world-class omnichannel retailer. Global DTC for us includes the brick-and-mortar stores and e-commerce sites that we operate. Direct-to-consumer growth of 10%, also its fourth year of double digits, reflected strength in each of our 3 regions. Revenue growth from our brick-and-mortar stores was up 8% globally. Performance of existing stores improved both internationally and in the United States, and we continue to build out our store network, which grew by a net of 81 stores in 2019. Global e-commerce was up 18% for the year, with strong growth in all 3 regions, largely driven by increased traffic.

We continue to enhance our omnichannel capabilities. We've accelerated the U.S. rollout of ship from store due to strong performance, and we're leveraging RFID technology in more than 600 doors across 17 countries and growing, including all of our company-operated mainline doors in China, to provide inventory visibility and meet consumer demand in real time. Both of these initiatives are adding to consumer experience and positively impacting top and bottom line.

We've introduced the all-new Levi's app and loyalty program in the U.S., which allows consumers to access curated editorial and brand content as well as purchase premium products available exclusively on the app, from limited edition, collaborations, the Levi's Authorized Vintage truckers. Looking forward, we plan to roll out the app -- Levi's app and loyalty program beyond the U.S.

Our strategies to diversify our global business are clearly working domestically and abroad. Our international business is approaching 60% of total revenues. Direct-to-consumer is heading to 40%. Women's is nearly 1/3 of total revenues, and tops is almost 1/4. In all of these areas, there remain a long runway for growth.

And underlying our performance for the year as it has always been during our long history is profits through principles. In 2019, we reaffirmed our commitment to the Paris agreement. We pioneered a contextual approach to water use to prioritize to saving water in areas that need it most. And we encourage others in our industry to sign on to reducing their carbon emissions to meet science-based targets. Our employees and consumers have come to expect that we will do what's right, and we operate with the firm belief that sustainability and business performance go hand-in-hand. And in today's environment, profits through principles is another thing keeping us at the center of culture.

Overall, it was a really good fiscal 2019, and we look forward to advancing on our strategic initiatives as we continue to gain traction in building a global lifestyle brand. We are well positioned to drive strong growth in 2020 and beyond.

And now over to Harmit to review the fourth quarter and year-end financials. Harmit?

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [4]

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Thank you, Chip, and welcome to everyone joining our call.

We were pleased to have delivered fourth quarter performance ahead of our expectations across gross margin, adjusted EBIT and adjusted diluted EPS and met our revenue plan. And we also performed better against fourth quarter expectations for U.S. wholesale. Absent certain factors, most notably that our fourth quarter did not include the benefit of 2019 Black Friday, along with the impact of our acquisition in South America, total net revenues continues to track with our long-term growth algorithm, and the underlying health of our business remains strong.

I'll now walk you through our fourth quarter and full year results before turning to our outlook for 2020. My comments today will reference comparisons on a year-over-year basis in U.S. dollars, unless I indicate otherwise.

We published the details of our reported and constant currency results in today's press release, so I will not repeat all of those here.

As Chip mentioned, our results were notably impacted by the lack of the benefit of the 2019 Black Friday week, which fell outside our fiscal year into quarter 1 2020, which I will refer to as adjusted for Black Friday. As such, my comments today will focus on our organic business results adjusted for Black Friday.

Fourth quarter net revenues of $1.6 billion, grew 3% in constant currency when adjusted for Black Friday, the impact of our acquisition in South America and the unrest in Hong Kong. Also note that we are lapping a strong fourth quarter 2018, which we grew 11% in constant currency.

The company's direct-to-consumer business grew 7% in constant currency when adjusted for Black Friday on expansion and improved performance of the retail network and e-commerce growth. Net revenues from the company's wholesale business declined 1% on both a reported and constant currency basis, reflecting the South American distributor acquisition as a decline in U.S. wholesale was offset by growth in Europe.

Gross margin of 54.3% increased 110 basis points on a reported basis and increased 130 basis points, excluding 20 basis points of unfavorable currency effects. On the back of a healthier inventory position and a stronger brand globally, about half the gross margin expansion reflected lower sales to the off-price channel, with the remainder primarily driven by the price increases we have taken, higher direct-to-consumer and international growth.

Adjusted SG&A as a percentage of revenue increased 50 basis points when adjusted for Black Friday, reflecting investments related to the continued expansion of our direct-to-consumer network, implementation of our omnichannel initiatives and the beginning of a global multiyear ERP upgrade.

Adjusted EBIT margin of 9.3% expanded 50 basis points when adjusted for Black Friday, reflecting the higher gross margin. Adjusted diluted EPS for the fourth quarter of $0.26 declined $0.04 compared to prior year due to the increase in the company's share count resulting from an IPO in combination with missing the benefit of Black Friday.

Now I'll share more detail in the fourth quarter results of our 3 regions in constant currency unless I state otherwise. Fourth quarter revenue in the Americas declined 2% when adjusted for Black Friday and for the impact of the acquisition of a distributor in South America. Direct-to-consumer grew 2% when adjusted for Black Friday. U.S. wholesale declined 4%, a sequential improvement from the prior quarter, primarily reflecting reduced shipments to the off-price channel this year and lapping the final leg of last year's Dockers line reset. Adjusted for these, the U.S. wholesale decline was 1%.

The disruption that many of our customers continue to experience in the channel was substantially offset by double-digit growth in premium and digital and a few bright spots at department stores, particularly high single-digit growth in our women's business.

Europe's revenue were up 11% when adjusted for Black Friday, with growth again broad-based across channels, product segments and markets. And this is on the back of mid-teens growth in the prior year. Direct-to-consumer revenues were up 11% adjusted for Black Friday, driven by strong traffic, and wholesale revenues were up 11% on broad growth across our customer base. The women's business continues to perform well, up 16% on the back of 19% growth last year. Levi's men's bottom grew 9%, driven by innovative new fits that are resonating with consumers. And Europe's profitability is really strong. On a full year basis, it's up over 200 basis points, showing real leverage as we grow revenue.

In Asia, net revenues grew 6% when adjusted for declines in Hong Kong, reflecting the unrest there and a seasonal shift in the timing of shipments in India. Revenue growth was broad-based across most of the region's market, particularly in the direct-to-consumer channel. Specifically in China, revenue was flat for the quarter as growth in our company-operated mainland and outlet stores was offset by a decline in the franchise and e-commerce channel.

Now switching gears to our full year results. I'm pleased to point out that in our first year as a public company, we delivered at the high end of our constant currency long-term growth algorithm. Revenue grew 6%. Adjusted EBIT was up 8%. Adjusted net income was up 14% augmented by a dividend yield of nearly 2%. The lack of Black Friday sales benefit, combined with our acquisition in South America and the unrest in Hong Kong, hurt the year-over-year revenue growth comparison by about 1 percentage point.

Fiscal 2019 revenues were driven by growth across all regions. Consistent with our strategies, direct-to-consumer drove the bulk of our growth, which grew 12% on a constant currency basis adjusted for Black Friday from both performance and expansion of the retail network as well as e-commerce growth. Global wholesale grew 4% as strong international growth more than offset a 3% decline in U.S. wholesale. And adjusted for the items we previously discussed, U.S. wholesale declined 1%.

Full year gross margin of 53.8% was in line with prior year on a reported basis. But excluding all currency effects, gross margin expanded by 60 basis points, above our long-term growth algorithm, driven primarily by direct-to-consumer and international growth and the price increases we have taken. As a reminder, our gross margin was under 50% only 5 years ago.

Adjusted SG&A as a percentage of revenues was 43.2%, flat to prior year as we levered on base costs and invested the savings behind the DTC growth. We've added net 81 company-operated stores to our retail footprint in 2019.

Adjusted EBIT margin was 10.6%, 40 basis points higher than the prior year. On a constant currency basis, when adjusted for Black Friday, again, well above our long-term growth algorithm.

Adjusted diluted earnings per share increased $0.04 to $1.12 on a reported basis and increased $0.09 on a constant currency basis.

Turning to balance sheet and cash flows. In dollar terms, inventory at the end of the fourth quarter was flat compared to a year prior. And the composition of inventory was healthy heading into fiscal 2020.

We delivered strong adjusted free cash flow for the year of $116 million, $21 million higher than the prior year, even after higher capital investment and a 27% increase in the dividend paid in 2019.

As we turn the page to fiscal 2020, we have hit the ground running and wanted to provide some color on holiday results, which for us is the combination of November and December.

In our recent holiday period, year-over-year revenue grew mid-single digits on top of low double-digit growth last year. Global direct-to-consumer and global wholesale both grew, and women's was up double digit.

We are particularly pleased with global holiday performance given U.S. wholesale was down high single digits as it lapped high single-digit growth the prior holiday, in part due to the lower sales to off-price, but importantly, on a 2-year stacked basis, U.S. wholesale is roughly flat. Holiday also yielded strong year-over-year gross margin expansion, above our long-term growth algorithm, reflecting the continued year-over-year reduction in sales to the off-price channel in the U.S. Additionally, given the strength of our brand, we were intentionally less promotional during holiday, both vis-à-vis the marketplace and as compared to our own promotional debt in 2018.

Now let's turn to guidance. As a reminder, we provide annual guidance, and we'll update our annual guidance each quarter as necessary as we move through the year. And we'll provide color on material items expected in the upcoming quarter.

Our full year 2020 guidance reflects a strong base business in line with the long-term growth algorithm, the timing of our fiscal calendar, the impact of our acquisition and another business model change and recently approved Board decisions to increase the return of capital to all our shareholders. We expect net revenues to grow 7% in constant currency and around 6% in reported dollars. This estimate includes underlying base business growth of around 5% in constant currency and approximately 2 points of growth from the benefit of having a Black Friday week in the first quarter as well as the benefit of a 53rd week, which will include a second Black Friday in the fourth quarter. Note that the net revenue benefit from the 2019 South American distributor acquisition we have previously discussed will be substantially offset by a change in ownership of our U.S. footwear distributor who has recently been purchased by a licensee partner. This will result in a license revenue stream, replacing what formerly was direct sales to the footwear distributor.

It's also important to note that there is no adverse impact to our fiscal 2020 EBIT estimates as a result of the changes in these business models.

Specifically, with respect to U.S. wholesale, based on what we know today, we anticipate that on a full year basis, U.S. wholesale will be roughly flattish to 2019, broadly in line with the long-term growth algorithm when adjusted for planned lower sales to the off-price channel during the first half of 2020. However, keep in mind that even with the full year flattish, we expect individual quarters to be quite choppy given the year we are lapping where U.S. wholesale in quarter 1 2019 was up 8% and Q3 was down 10%.

Turning now to EBIT. In 2020, we expect full year adjusted EBIT margin expansion in the range of 30 to 40 basis points on both the constant currency and a reported basis. We anticipate gross margin expansion well above our long-term growth algorithm, largely due to the outside favorable mix shift in direct-to-consumer related to the 2 Black Fridays as well as continued favorability from our geographic mix and price increases. We also expect lower sales in the off-price channel to help gross margins.

However, we also expect adjusted SG&A as a percentage of revenues due to a number of factors, including continued strategic investments in direct-to-consumer and higher advertising to support our growth objectives, particularly in China as well as the impact of new lease accounting standards and the tax treatment for new equity-settled awards.

Based on our net revenues and adjusted EBIT guidance, we expect adjusted diluted EPS in the range of $1.18 to $1.22, which incorporates a tax rate in the range of 20% to 21% and our expectation that currency translation will unfavorably impact the comparison to 2019 by about $0.01.

We have a strong balance sheet, access to $1.8 billion in liquidity and are generating returns on capital in the mid-teens. Given the confidence in our long-term growth algorithm and access to substantial liquidity, we are announcing the following capital deployment plan, which will fuel long-term growth and return capital to shareholders. We're planning capital expenditures of approximately $200 million to $210 million, inclusive of nearly 100 new company-operated store openings on a gross basis in 2020. This is in addition to the 80 stores that we've recently taken over in South America. And we're moving to quarterly dividend payments and have announced our first quarterly dividend of $0.08 per share. At this rate, full year dividends will fall in the range of $130 million, an increase of approximately 14% as compared to 2019.

Additionally, our Board has approved a share buyback program that we will use to offset dilution that would otherwise be introduced from our stock -- employee stock grant. Based on today's stock price and the vesting schedule of the awards, we anticipate using cash in the range of $80 million to $100 million in 2020 for this purpose.

Before we move to Q&A, please note the following color with respect to the first quarter of 2020. While we do expect a strong quarter for total company revenues, we are anticipating revenue growth will come in a bit below our full year revenue guidance, reflecting an expected decline in U.S. wholesale as well as the risk from the coronavirus, the impact of which we will quantify as the situation develops.

We anticipate that the U.S. wholesale will be down significantly in Q1 driven by 2 factors. First, as we lap 8% growth last year. And second, given the improved health of our inventory, we expect lower sales to the off-price channel.

Additionally, despite anticipated strong gross margin expansion in the first quarter of 2020, we expect adjusted EBIT margin in the first quarter to be mostly impacted by 2 factors as compared to prior year. First, we expect about 100 basis points of adjusted EBIT margin decline from higher advertising as we plan to smooth out advertising by bringing more of our spend into the first half of the year. Second, the timing of the employer tax expense for new equity-settled awards will hit us when they vest in Q1, and this will pressure adjusted EBIT margin by approximately 50 basis points. Note that we expect adjusted EBIT margin to build back towards our annual guidance as the year progresses.

With that, we'll now turn it -- we'll now open it up and take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bob Drbul with Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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I guess the first question is probably towards Harmit. You guys mentioned the annual algorithm in the prepared remarks. I was just wondering if you could just sort of remind us or refresh exactly what you guys consider the algorithm to be.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [3]

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Sure. Thanks, Bob. Good question. Our annual algorithm basically talks about growing revenue in the mid-single-digit range. So think about 4% to 6% in constant currency. That's basically comprised of the Americas growing 2% to 4%, Europe and Asia in the high single digits. And we consider channels, wholesale growing globally in the low single digits and direct-to-consumer growing in the high single digits. And on a product basis, the men's bottom business growing low single digits. And the tops and women's business growing high single digits. So that's the -- on the growth side.

Then on the adjusted EBIT side, we expect to grow a little faster. So expect to grow our EBIT in the mid- to high single-digit, especially as adjusted EBIT expand 20 to 30 basis points annually. And then there's leverage on fixed cost of interest and -- which is -- because we expect the debt levels to be largely there. This is going to be augmented by our increase in dividends, which we've just talked about, driving a total shareholder return of close to 10%. And then on top of this, while we've announced plans to buy back the shares just to offset dilution, longer term, we can increase our share repurchase as well as M&A. So all that is on top of the TSR growth of 10% as we look at growing annually on a constant currency basis. Does that help?

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [4]

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Got it. Yes. That's great. And I just have -- I think a question for Chip. Just -- I think you talked about the balloon jeans. Just sort of 2 product questions for you. Are skinny jeans fading in favor of pleated jeans? That's my first question. And then the second one is, are shaping jeans becoming a trend? I saw recently that the totally shaping pull-on skinny jean from Signature by Levi's was the #1 best selling on Amazon. I just wondering if you might be able to comment on those 2.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [5]

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Which is true, and thanks for plugging that, Bob. On the trends, I would say that the overall trends driving the category holistically are kind of a continuation of the same theme we've been seeing for the last year or so, which is a macro trend of casualization, the evolving impact of streetwear -- and streetwear influence, and clearly, in '80s and '90s theme going on. On women's, everybody's been talking about the death of the skinny jean for years. And I will say that the skinny is still more than 50% of our total women's bottoms revenue, but women want a wide range. And I think part of our success over the last couple of years in women's has been meeting her need for fit fabric and -- fit and fabric in particular and finish as well. I call it the 3 Fs. And so we've been leading in some of the more fashion-forward fits like loose, which is the balloon jean that we mentioned in the prepared remarks to the wide leg and high rise and straight. I mean we've led the trends as the rises have been going up. And our -- one of our fastest and hottest items that are aligned is the rib cage skinny, which is our highest rise women's jean ever with the 13.5-inch rise. So the fashion fits are clearly driving a lot of the growth. In fact, our fashion fits on women's were up about 87% over the prior year. But the core skinny business is still a huge part of the business, and it's still an important part.

And then on the shaping jeans, we've been selling shaping jeans for over a decade. And there are some women where that's really an important consideration for them. They want a jean that flatters them and celebrates her curves. And we offer it across many parts of our line. The Signature jean that you referenced is the #1 selling jean on Amazon. And we've got more coming in this space in 2020 as we look ahead and more on that later in the fiscal year, but it is certainly an important part of our women's business.

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Operator [6]

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Your next question comes from Matthew Boss with JPMorgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [7]

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Congrats on a nice quarter. Maybe to break down the U.S. landscape. Chip, can you elaborate on growth opportunities within U.S. wholesale that you're excited about? And just your confidence in managing this part of the business flattish and then just maybe touch on some of the drivers of the continued direct-to-consumer runway that you see remaining also in the U.S.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [8]

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Yes. So back to the growth algorithm, just to kind of get everybody grounded. We say we'll -- we're going to -- U.S. will grow kind of 2% to 4%. And within that, we're saying we will kind of deliver a wholesale business roughly flattish year-on-year. And that's what we've been able to do over the last 3 years on a CAGR basis.

And in today's environment, there are winners and losers. So first and foremost, we are focusing on winning with the winners. But within every single customer, we have opportunities, and we're focused on the largest stores and showing up great in the largest stores of all of our big retailers.

We have portfolio opportunities as well when you look at segmentation of the wholesale base. So as you know, we've been really focused on premiumizing our offering here in the U.S. based on the strength of the brand that has led to incremental distribution in some of the more premium wholesale customers. And we still have opportunities there. We've been upgrading our in-store fixtures in a number of these premium wholesale customers over the last year or so. And then we've also been expanding in the mass channel, as you know. And today, what we've done in Target, we're now in 50 stores, heading to 70. And I think we'll go a little bit faster than that over the course of the next year. That's been very, very positive for us. We have a lot of data that shows that it is largely incremental.

In fact, we've run some consumer research where Target consumers have said it's the first time they bought Levi's jeans in a long, long time. So we have a number of levers to push and pull, and that's part of what gives us confidence. And there's still some white-space opportunities that we're chasing down. So the strength of the brand that grounds us and everything, and that gives us conviction that we can continue to maintain a roughly flattish wholesale business, and will be choppy just to reinforce that point one more time. Quarter-to-quarter, we're going to have our ups and downs as we go through the year just as we did last year. But we're confident we can -- we've challenged ourselves that we're going to maintain this business at roughly flattish as we go forward.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [9]

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And just for clarity, Matt, the 2% to 4% was Americas broad, U.S. was 2% in the marketplace.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [10]

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Great. And then maybe, Harmit, just a follow-up. On gross margin, how best to think about the drivers and level of gross margin expansion that you've embedded in your 2020 outlook? And then just for Chip, what inning would you say that the brand's pricing power is today globally?

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [11]

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I can answer that one first. That's really easy. We're still in the very, very early innings. So first -- bottom of the first half of the second maybe. We've taken some pricing action in Europe in the second half of the year. We'll see some pricing action go into effect in the U.S. here early this fiscal year.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [12]

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Yes. So just building on that, Matt, I would say the tailwinds, or the factors that contribute to gross margin expansion, price increases, as Chip talked about, sourcing savings, continue to drive our leverage on volumes. The reduction of off-price, which is we're continuing that through quarter 2 of this year. And then the benefit of growing our direct-to-consumer channel as well as international. Now in 2020 because we have 2 Black Fridays and it's driving direct-to-consumer business, that helps. Acquisitions will probably have a marginal impact. The headwind, maybe a slight headwind on currency, not a lot, but slight in 2020. So I think that's why we feel good about a higher gross margin in 2020 relative to our growth -- our algorithm, which was 40 to 50 basis points.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [13]

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But one other thing I would add, Matt, and we mentioned it in the script is it does get back to brand strength on the Levi's brand. And through the holidays, we were intentional to not be -- not chase the competitive marketplace. And as a result, our promotion levels, the depth of our promotions was less than it was the prior year and less, in general, than what the marketplace was, and we still had a decent holiday. So I think, again, it just underscores the strength of the brand.

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Operator [14]

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Your next question comes from Omar Saad with Evercore.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [15]

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Wanted to ask about the revenue guidance. It's a little bit ahead of the long-term algorithm that you're discussing, Harmit. The plus 7%, it's a good number. Maybe you guys could break down some of the key chunks that gets us there. I know there's some noncomparable components around the Black Friday. How big of a piece is that? Should we think about pricing? What's the underlying U.S. wholesale and broader Americas assumptions? Maybe some of the key pieces there. And then I also wanted to ask if you could dive in on Europe a little bit. I think it slowed a little bit more on a constant currency basis than we thought, maybe if there's any kind of color to add around that market.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [16]

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Sure, Omar. So our guidance, as we begin the year, is 7% on constant currency, 6% on reported as revenue growth year-over-year. We are saying our base business, so algorithm, where I talked about 4% to 6%, middle of that, about 5%. And I talked about the different components. To your question about U.S. wholesale, we're saying flattish. And by the end of the year, adjusted for the off-price reduction that we're doing.

In terms of what makes up the 7%, we are saying 2 percentage points, largely driven by our fiscal calendar. So each Black Friday will help by about 50 basis points. That's about 100% -- 100 basis point improvement. And the 53rd week is about 100 basis points. It's probably a little lower than what you guys have in your model, largely because it's not as simple as taking 1 week from the year and extrapolating it for a couple of reasons. Let me explain that. One, not every part of our global business has a 53rd week. So largely Asia runs on a monthly calendar, and there are some markets in Europe with a very similar monthly calendar. So they're not going to have the benefit of the 53rd week. The second, if you take the other -- the remaining business, our direct-to-consumer business, this trade extrapolation, you could take 1 week, and that's the impact on the 53rd week. But the wholesale business, what we're assuming is about 50 basis points, largely because it's the replenishment sales that we're incorporating, largely people and the open the book by -- done on a monthly cadence. So that's how we're thinking about it. And that's why it's 100 basis points on for Black Friday, 100 basis points for the 53rd week, and that's making it up. Now we've done an acquisition in South America that was supposed to help. It was supposed to be a headwind this year. But late last year, early this year, one of our licensed partners bought a distributor. And so it's a license partner who used to handle our footwear business in the U.S. for Dockers, is [now] part of our footwear distributor for Levi's. And so we definitely see synergies and benefits longer term with this combination. But the business model change that offsets the acquisition that we talked earlier. Does that help, Omar?

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [17]

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Absolutely. And could you maybe give us some color on Europe as well?

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [18]

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Yes. Sure...

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [19]

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And what's the underlying assumption -- and what's the underlying assumption on price, sorry, for this fiscal year-end?

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [20]

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Yes. The underlying assumption in prices would be factored into the revised gross margin in our normal gross margin perspective is 40 to 50 basis points. We think 60 to 80 next year is probably more like it. So that incorporates the price changes, which we think will stick broadly.

Relative to your question on Europe, Europe grew 11% adjusted for Black Friday. It's a tad bit softer than the remarkable growth they had. And that's just a law of large numbers. Our belief is Europe, longer term, we've said that in our growth algorithm, is more high single digit, low double-digit business. But having said all that, they're leveraging beautifully on the profit basis. The business is now close to $1.6 billion, $1.7 billion. And the operating margins are now close to 20%. So they've got this business positioned for driving profit growth long term.

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Operator [21]

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Your next question comes from Heather Balsky with Bank of America.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [22]

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I was hoping, first, if you could talk about the U.S. store test that you're running. And I guess how these stores compare to your existing fleet? And what you're testing exactly? And then also, how you think of the U.S. store opportunity long term as these tests work?

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [23]

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Okay. Heather, are you talking about our owned and operated stores? Is that what you're asking?

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [24]

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Yes. Yes.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [25]

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Okay. So we've talked about this, I think, on the last call. Basically -- so our big opportunity in the U.S. is mainline doors. I go back to part of our strategy for the U.S. The U.S. is unlike just about any other market globally. It is largely a Tier 3 market with prices on apparel Levi's Red Tab at roughly $40. You go to Europe, you go to most of Asia, and we're in the $100, $90 to $100 price point as our opening price point, and more mainline doors there. Here in the U.S., we have roughly 30 mainline doors, and that's it. And they tend to be larger doors, often not in great locations.

The model that we're now executing is smaller stores, call that in the range of 3,000 to 4,000 square feet with a tighter assortment in better locations. So it's more capital efficient. These stores tend to be more profitable, and they're in better locations as well and a great presentation of the brand. It's basically what we're executing in most of the rest of the world, but we've never executed it here in the U.S. And so we have a couple of these stores already right across the Bay from us here in San Francisco and Emeryville is a good example. And we're going to open -- in the plan, we've got a couple of doors like this that we're going to open in 2020 that are in the range of 2,500 to 4,000 square feet in great locations. We've talked before, one example, is we will open a store this spring in the Stanford Mall. We have no stores down at Palo Alto or around Stanford. The Stanford Mall is an A mall, and we don't have a store there, and we're in a great location with a relatively small footprint. And we -- and that on paper, that store pencils out to be very, very profitable.

If we can prove this model out, then we will expand the model over time, and we'll do it judiciously. We're pretty diligent and deliberate about capital deployment, but that -- that's basically what we're all about. And we'll have more as we go through the year on how those stores are performing.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [26]

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Great. And Harmit, just a question on SG&A for 2020. Can you help us break down the drivers a little bit more? Can you quantify the impact from the accounting changes, the calendar shift and extra week and also the ramp in marketing relative to 2019?

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [27]

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Yes. So if gross margin is 60 to 80 basis points, I'd say, SG&A is probably 30 to 40. That's what gets you to the 30, 40 adjusted EBIT. Basically, the -- so most of that's made of I'd say higher advertising, probably 10 basis points, something in that range. The payroll tax is just the -- to get to being a public company, we have to pay taxes when the awards vest, and that happens in Q1. That's about 10 basis points. And 10 basis points reclass between interest and SG&A as we implement the lease standard. And the rest is largely a direct-to-consumer expansion. So those are the factors that drive an SG&A increase year-over-year.

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Operator [28]

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Your next question comes from Kimberly Greenberger with Morgan Stanley.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [29]

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Okay. Great. I wanted to just ask, as I'm adjusting my 2020 numbers here for the guidance given today, we want to make sure to keep in line our 2021 forecast so we don't get out of whack, and understanding that you're not giving 2021 guidance today. I'm just wondering if I should infer by the fact that you're looking for 7% growth this year with a base business at 5% and the 53rd week will not repeat in 2021, nor will you have 2 Black Fridays. So should I think about more of a 3% growth rate in 2021 as we normalize for the outsized performance here in 2020?

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [30]

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Yes. I mean I haven't done the math, Kimberly, but I use the growth algorithm that I talked about, which is the mid-single-digit growth. And yes, you are lapping a stronger year. So whatever the number you get on that basis will be the basis. You adjust for the Black Friday. And I think I'd use that. And if -- depending on some of the pieces of our business accelerate to the second half of the year, which is largely Asia and China, we'll update you folks as the quarter's track along.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [31]

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Okay. Great. And then I just wanted to ask about the expanded distribution here in the U.S. with Target. And I wanted to understand a little bit about what you're monitoring in order to make sure that, that business is incremental rather than cannibalizing other U.S. wholesale business. What are the checkpoints you're looking for?

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [32]

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Sure. So we are monitoring this very, very closely. As you can imagine, it could be seen as being disruptive in the marketplace. But I don't know if you've been into a Target or if you've seen it, but my starting point is on both the men's pad and the women's pad, and I was in my Target that has this literally 3 days before Christmas, and the merchandise price point on the pad on both the women's and men's pads was $49.99. And so we are selling at a premium to the market. The average marketplace price for a pair of Levi’s today is about $40. And so the first check with cannibalization is Target is actually selling and attracting new consumers at a higher price point, consistent with our whole strategy of trying to premiumize the brand. We've run consumer research inside of Target to see whether these consumers have bought Levi's in other locations, including our own doors, and the vast majority of those Target would call in those guests, have indicated that this is the first time they bought Levi's in a long time. And then the other thing we're doing in all of the test stores, we've drawn a 5-mile radius around each test store, and we've looked at our premium post business results in other customers and see very, very little cannibalization. So net-net, we're pretty confident that this is incremental for our business. It's clearly incremental to Target, but it's also incremental for us and having very little cannibalizing effect on our other customers. So -- and we've got a high degree of confidence in that, which is part of the reason we're willing to continue to move forward. Target has done a great job executing as well. If you go to the pad, the brand looks great. And I think the way we're looking there over some other places right now. So it's really been good for the brand.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [33]

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I think we have time for 1 question. And then the others, we will respond. We know who's on the queue. We will respond as part of our sell-side calls that we have set up. So maybe 1 question.

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Operator [34]

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And your last question comes from Dana Telsey with Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [35]

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Given, Harmit, your commentary on the first quarter, can you unpack how we should expect the cadence of the year to play out and what you're looking -- how you're thinking about it, especially given these 2 Black Fridays this year? And then on, Chip -- go on. Sorry.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [36]

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No, no. Why don't you finish?

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [37]

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And then, Chip, as you think about the wholesale business, the differences between the U.S. versus Europe, what do you see as the biggest differences? And whether it's Asia, whether it's Europe, and what the learnings could be from one to the other if you were to drive growth globally in terms of wholesale to the levels you'd like?

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [38]

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Okay. Dana, now I'm going to principally stay away from guiding the quarters, but I'll give you some color. So I would say that, as we've said, the first quarter, slightly below our full year number driven by the factors I talked about. We haven't quantified the unfortunate -- impact of the unfortunate situation in China because that's evolving, as we speak, and we will give you more details of that when we report our first quarter results. I think quarter 2 is progressively better than quarter 1. And quarter 4 is the strongest quarter because it's got the Black Friday and the 53rd week. That's how I would kind of progress the quarterly flow of revenue, and we'll give you the color on EBIT as the quarters progress.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [39]

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Great. And on the biggest difference between the U.S. wholesale and Europe/rest of the world wholesale, I would say there are a couple of important dynamics. Number one, in the U.S., there is a very heavy off-price component. And we've talked about strategically how we're trying to manage that. But if you look at denim consumption in the U.S. over the last 12 to 18 months, a lot of the consumption has shifted to off-price, TJ Maxx [loss], and there's much less of that dynamic going on in wholesale in Europe -- I mean Europe and Asia. The other big difference is really a difference in our business. Here in the U.S., as I explained, the U.S. is largely a Tier 3 market, and our U.S. wholesale customers are selling Levi's out the door day in and day out in a price ranging from below $30 to kind of mid-$40 day in and day out, with an average around $40, which, by the way, is much better than 8 years ago when I got here.

In Europe and in Asia, we have primarily a Tier 2 and Tier 1 business. So better and best. In the U.S., it's a good quality market at good price points. And in Europe and international, it's a better and best quality, which is consistent with what we have in our mainline doors. So the pricing and the product that we've got in wholesale in Europe is very similar to the pricing and product that we've got in our mainline doors in Europe. And that's -- and that -- so we have much more of a premium representation of the brand. And the brand pricing on average across most of Europe and most of Asia is in the kind of $80 to $100 price point as opposed to $40 here in the U.S. So those are probably the 2 biggest differences. I guess the only other thing that I would say about Europe today versus the U.S., although we've made some good progress in the U.S., is Europe has been much more successful with the women's relaunch, which we did back in the middle of 2015 in wholesale, and our European wholesale business on both men's and women's tends to be much more of a lifestyle representation of the brand than what you see here in the U.S. where we're still largely being treated as a classification, where blue jean bottoms and a lot of customers when you still walk in, whereas in Europe, the Levi's brand is much more a head to toe, much more of a lifestyle representation of the brand. And not surprisingly, our women's business is better developed, and our tops business is better developed in Europe than it is in the U.S. So that gives you a little bit of an insight on why we're trying to do some of the things that we're trying to do in U.S. wholesale to begin making U.S. wholesale look more like Europe and Asia from a wholesale dynamic. I hope that helps.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [40]

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It does. A lot of opportunity.

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Charles Victor Bergh, Levi Strauss & Co. - President, CEO & Director [41]

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Absolutely. That's how we look at it. All right. Well, I think we'll close it there. I want to thank everyone for dialing in and for participating. Sorry, we went over by a little bit. Chris, Aida and Harmit will be on the phone with most of you over the next day or 2, and you'll have plenty of opportunity to go a little bit deeper with them on those follow-up calls. But thank you all for joining in, and we look forward to talking with you again at the end of the first quarter. Have a good day.

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Harmit J. Singh, Levi Strauss & Co. - Executive VP & CFO [42]

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Thank you.

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Operator [43]

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Thank you. This concludes today's conference call. Please disconnect your lines at this time.