Levi Strauss & Co. Class A Aktie

Okay. Great. Thanks. It's Matt Boss, retailing, department stores and specialty softlines here at JPMorgan. Really happy to host today the team from Levi's, CEO, Michelle Gass; and CFO and Growth Officer, Harmit Singh. So the format for today is fireside chat, and we'll open it up at the end for questions in the audience. But with that, Michelle, Harmit, thank you for joining us, and thanks for joining again at the Retail Roundup. And congrats coming off of another very strong quarter.

Thanks for having us, Matt.

Absolutely. Yes. So maybe to kick off and exactly on that point, coming off of the strength in the last quarter, the organic growth rate, another quarter of high-single digits. Maybe if we think about growth building on growth, the strength in '25, the strength now to kick off '26, how best to think about your results relative to the denim market, what you think is company-specific, what maybe is industry?

Yes. Well, so first, I'd say we are really pleased to deliver a 9% organic, 14% reported and to your point, coming off of a 7% growth last year. I'd first say that this is a direct result of our strategies. Our strategies are gaining traction. The strategies are working. And first, I would say this move to become a best-in-class DTC-first retailer. So DTC is now half our business. It will be half our business for the year, and that's working, up 10% in the quarter, as you saw, 7% comp growth, 16 consecutive quarters. So this isn't like a flash in the pan, right? Not even a last year thing.

I mean this momentum has been building. And the DTC results, and it has not been at the expense of wholesale. So wholesale also had a great quarter, up 8%, and we can dive into that. So as we look at it, it's really strength across the board, which goes back to the strategies that we're working. We have strength across every geography. We have strength across men's and women's, tops and bottoms, the list goes on.

The category is growing, right? In fact, in the U.S., it's even accelerating a bit. We're the leader in the category. So I like to believe that we're helping fuel that growth. And we're doing it through innovation. So our core in the business is really healthy, but our fashion and our newness is really resonating. And then marketing. So that is helping. We'll probably talk about that as well in terms of -- we've been a brand-led company for a long time. Last year's campaign about Beyonce was a huge success, put us on the global stage and then this year, we kicked off literally on the global stage with the Super Bowl with our new brand campaign, which is off to a great start, delivered in the quarter, but has a long runway ahead. And then the last thing I would say is it's around execution.

So the good news as we sit here today and as we go into, I call it, this next phase, next chapter of our transformation, it is all about execution. We spent the last couple of years sharpening our strategies, making some big decisions like selling Dockers so that the entire organization could be focused on unleashing the potential of the Levi's brand, still nurturing Beyond Yoga and then as we grow, driving that more profitably, and it's working.

Harmit, maybe if we could talk about the composition of that underlying organic as we think about units relative to AUR and just pricing power that you see for the brand globally.

Sure. Just building on Michelle, it's not one element of the business that's driving outsized growth. It is every facet of the business. So what I like to call the power of the end. So you think about -- and that will answer your question, which is the U.S. was up, international was up. Wholesale was up, direct-to-consumer was up. Women's was up, men's was up. And AURs were up and we were selling more units. I mean -- and it's a good balance between AURs and units. I mean I do believe as we expanded our addressable market 15x from a $100 billion denim segment, we were not even playing in the premium denim segment with the launch of Blue Tab, now we have entered it.

But as you think about the expanded TAM 15x larger of $1.5 trillion, think about non-denim bottoms for men, which we have launched. We're just scratching the surface. Think of denim skirts and dresses just launched, just scratching the surface, waist up, which is the other part of the end. Tops were up. and bottoms are up. And we've started tracking what we call the new TAM. The new TAM grow this quarter delivered 25% of the growth. Last year, it delivered 1/3 of the growth. And it's all built around the denim aesthetic.

It's not that we're just launching a top for the sake of top, making sure the top or the bottom has some element of denim. A linen has an element of denim. Our outerwear has an element of denim. So that's the way I think to think about the growth and why we feel really good about the growth. So that's your AUR and your unit question. You had a second part to that question. Was that?

Just the balance and the opportunity that you see across regions.

Okay. Across regions. So Asia -- so if you think of our guidance was, I think, 4% to 5%, we kind of delivered 9%. So what drove the outside growth? It was wholesale. 2/3 of the growth was wholesale, primarily Europe and the U.S. And I'll talk about that in a second, and it was Asia. China, after a long time, grew 8%, right? It's a small piece of the business. We think there's an opportunity, but India grew. Japan grew and the other countries. And I think that was a big piece. And Asia continues to be underpenetrated for us only because you can argue half the world's population is in Asia, and it's about 20% of our business, right?

The brand is really strong with the consumer, and we are leveraging that. And as a CFO, putting on my CFO hat, not the growth hat, it's important to look at Asia's operating margins. You look at the last 3 years, it's grown every year because as you drive the volume leverage, you're going to drive that throughput. So that's really, Matt, to your question. And on wholesale, again, the part of the end, we grew -- the wholesale growth was largely driven by women and by tops and balance between AUR and units. And I think Michelle's point on the strategy, the lean into DTC is beginning to have an impact on wholesale because as our customers start seeing it working, seeing in our own business, in our own e-commerce, they're beginning to lean in.

You go to Herald Square here, you'll see the best representation in Macy's of our men's floor space, more denim lifestyle. You look at the women's, more denim lifestyle. So I think you're beginning to see those elements come to life. It just takes a little longer.

I mean double-digit direct-to-consumer growth in the latest quarter. Can you talk about new customer acquisition? I think it's perfect and great example of what's happening in that brand.

Yes, we are seeing that. And you're able to really understand that with e-commerce because you have a lot more information. But 70% of the new customers we see coming into e-commerce are in that younger consumer band. So that's really exciting. And we're doing that and it's, again, not at the expense of the multigenerational impact that we have. But we're not getting this results -- these results just on the back of our existing customers.

Surely, we're bringing in lots of new consumers. And it speaks again to the strategy, the product is relevant. Building on what Harmit was just saying, this idea of taking everything that's great about Levi's, we are known iconic for our denim bottoms, and we will always protect that. But now to the consumer and the consumer is voting with their wallet saying, they want us to do this to expand into a much bigger pond with really playing in the entire apparel category.

So what was just denim, we still track that closely, but 15x, we're talking $1 trillion plus in the apparel market. Now with that comes the responsibility to be very targeted on how we play because you don't want to be all things to all people, right? And there's many case studies of brands that get too diluted and lose their focus, and that's not us. I mean, as we have gone after the categories of tops, we want to make sure that it's complementary to our bottoms business. It always starts with denim, but it doesn't mean that everything you're going to find in our store is denim, but we'll have the DNA of Levi's, and that's what working. But we had to build the foundation.

We brought in new talent. We brought in new vendors, new capability, and that's what's helping to really accelerate the growth. And so I think as we're sitting here a few years from now, people are going to look to us and see us not just going to love our jeans, but they're going to see us as a place to go shopping head to toe. Back to your point around -- so it knits together because how are we getting these great results in DTC. I mean, denim lifestyle is driving a big piece of it. Women's is driving a big piece of it. And if you look at parts of the world in DTC, women's is half the business in certain geographies when we can create that whole experience.

Wholesale is lagging because we don't control that experience, right? But as Harmit said, they're drafting off of the wins. Our key customers are going into our stores saying, I want that, I want that. And that's happening in our mainline doors. It's happening in outlet. So we have also those multiple tiers to appeal to different consumers. The other piece that we're doing to get after these incremental categories, if you take women's, 38% of our business. That should be 50%.

Like I said, we see pockets where that's already happening in parts of our DTC business, but we are creating that experience in the store. So if you're in our main -- most of our mainline doors here in the U.S., we've completely remerchandised. What used to be you'd go into the store, you'd be hit with men's first and you'd see lots of stacks of jeans. We still want to sell a lot of jeans. Now if you go in, actually, we put the women's presentation in the front because the guys know to go in the back to get their 501s or 511s but you're getting that shopper, that female shopper who's walking by and seeing the windows and they're like, wow, and it's head to toe, right?

So -- and it's not just tops. So tops include, yes, the buttons down, the blouses, the T-shirts, the sweaters, but we're doing skirts, we're doing dresses. And all of those categories feed into this denim lifestyle. And that is what's joining momentum. So for women's to be up 13% in the quarter for tops to be 13%. And by the way, on tops, I'm kind of speaking to that female strategy, but tops are working for men as well.

And you're doing it in a full price selling way. I think one of the things that we've talked about is you actually rationalized SKUs and got back to a strong foundation, and now you're growing off of that foundation. Maybe it's a question for both of you, but Harmit, on the SKU rationalization and as -- and how that is now having an impact from profitable sales, not just sales. Maybe if you could speak to how that.

Sure. And give Michelle a lot of credit for driving real focus on really making sure 2 things. One, we are really focused on our big bets and more commonality around the world. So if you think of the low loose or you think of non-denim pants for him, these are globally directed assortments, right? And that doesn't mean the open to buy goes up. That's why I come in, in my CFO role and say, "No, no, no, you can't do that." We have to look at the assortments that are not as productive.

If we have 15 colors of black because over time, that's what's happened. Let's really take a hard look and reduce that because the consumer doesn't tell the difference, but we spend maybe different fabrics, different vendors, et cetera. So what we've really done is we have reduced the SKUs probably 25% around the world. That has led to better negotiation with the vendors. It has led to lower markdowns. And so -- and I don't think we're done, right? Because that's really a journey.

I mean, if you think of directing assortments, we have started with mainline, which is our own stores, let's think of DTC. We're probably over 50% now. We haven't yet touched wholesale. And that's the next journey is start now making sure you can rationalize some of the SKUs in wholesale, start rationalizing, directing more assortment so that when a consumer walks in, he or she sees very similar stuff around the world. So that's -- and that's helping margins.

The other thing that is happening is we are reducing promotions. The product is working. You can drive more full price selling. So one of the ways we are able to help offset some of the tariff pressure and why we feel gross margin has an opportunity to continue to grow is we're just starting that journey. And we're nowhere -- anywhere close to even 70% of full price selling, right? I mean Europe does a very good job, followed by Asia, followed by the U.S. And as we build these full-price stores, as we direct more assortment, I think that's an opportunity.

Michelle, I think you've cited an additional $10 billion TAM on the premium side. Where are you today? Where do you see that opportunity? Is that bringing in a new customer?

So we're very early in the journey, but the early indications are positive, really positive. So -- so Blue Tab, and it's part of our segmentation strategy. So the core and the backbone of our business is Red Tab. How most people think about Levi's, the vast majority. We have Signature, and we can talk about that, too, especially in an environment where there is pressure on a segment of the population. That business was up 16%, and that is sold in places like Walmart and it's on Amazon and really speaks to that consumer looking for more value, price point, $20 to $30.

Blue Tab. So very excited about Blue Tab. So this is sort of the pinnacle expression of the Levi's brand, very premium, $10 billion addressable market, and we are less than 1% share. As the denim leader, even if we capture our fair share, that's a sizable incremental opportunity. We see parts of the world like -- so really inspired by places like Japan, which has a very sophisticated consumer that actually makes up a sizable part of the business, and I should back up. So Blue Tab, which is what we're calling it to the consumer, was inspired by -- previously, we would sell things like Japanese denim salvage.

We would do made and crafted was another part of the line. And it was a bit fragmented. And it was really through a consumer who said, well, I like the stuff with the Blue Tab because that's the good stuff. It was like, okay, let's just simplify and let's create this new category for us called Blue Tab. And what started, again, based in denim, call it Japanese denim bottoms, we are now developing full collections. And that is going to allow us to get into bottoms, tops, jackets, blazers, other fabrications and perhaps not everything from Japan. There's amazing fabrics out of Italy. So to answer it, we see a lot of upside. It's upside to the business, and it creates a nice halo to the entire Levi's brand.

Now, to piggyback off of that, as you kind of alluded to, I mean, I think one of the things that's really resonating is that there is something at Levi's for everybody. So maybe could you elaborate on the segmentation strategy, what you're seeing across maybe all of the income demographics?

Yes, yes. So kind of further building on what we're seeing. So let's go back to the core of our business, which is Levi's. To date, and as we all navigate another kind of time of uncertainty, to date, we have not seen an impact to demand. We're staying very close, but we're a great value. I mean it's the quality. Consumers are responding to the innovation, to the newness. So the core of our business is really healthy. And then as I said, Signature, so to talk a little bit more about that, Signature by Levi's Strauss targeted at that consumer who wants value, but we're still going to give them an amazing product. And as the Signature team has seen what's working for Levi's, women's, head-to-toe, denim lifestyle, tops, jackets, sweaters, layers, et cetera, they've built now that innovation into Signature, and it's really accelerating up double digits in the first quarter.

So we do -- I mean, we do offer something for everyone, but yet in a very focused way. And I think that's been a big part of the benefits we're seeing. And we're looking at this around the world and focusing our resources on because if what's going to resonate, especially in a time where consumers are going to look to brands that they know, that they trust. When the wallets get tighter, we have to work harder, right? If there's more pressure on the choices they have. So we've got to show up with excitement. And that's where, as Harmit was talking about, we've really -- we've rewired this company.

We're still rewiring it to operate as a best-in-class retailer and go-to-market has been a big part of that. So how do we get more leverage and scale? So what Harmit was referring to, the directed assortment or having a more aligned assortment globally, that is great from a focus standpoint, so the entire company can get behind what the big bets are. And so in first quarter, it was all about the '90s look, grunge prep as we called it. And grunge prep is happening all around the world. And that was a big -- that newness was a big contributor to our growth.

That commonality is now 50% that will probably approach the 75% mark. So you just think about the efficiencies and the scale you can get helps the top line, and it will help the bottom line, help margins. Yet there's still room in that 25%, 30% for the markets to get what they need to be locally relevant. So we are staying super close. And then just the last thing I would say on pricing because it's a hot topic in this environment. I mean, we put a lot of work into how to price, where to price to mitigate some of the tariff headwind and then to also say, we have pricing power. So let's price for the innovation, let's price for the newness. And like I said, that demand is continuing. It's continued right into the second quarter.

And also probably worth mentioning, and Harmit can speak to this, but back to tariffs, as we increased our guidance just a couple of days ago when we shared on the call, we also have not yet baked in what could be some favorability from a tariff standpoint, and that's worth about $0.07 on EPS.

I was going to ask you, you historically take a prudent approach. There's prudence on the tariffs. Maybe on the -- and so if you could maybe touch on that, it seems like you also have taken a prudent outlook as it relates to the consumer. So maybe beyond the fact that, as Michelle, you just said, not seeing any impact today, what have you embedded as it relates to the second quarter and maybe for the back half? Is there what we potentially could see embedded in your guide?

Yes. We beat Q1 by a mile, top line, bottom line. We probably flowed 1/3 of that beat into full year. And there were a couple of reasons for that. One was it's early in the year. What we've demonstrated is we can lap strong growth with strong growth, right, because of the different things that Michelle and I have talked about. We were prudent only for a couple of reasons. One was early in the year. The second was given the macro uncertainty, it was important to ensure that the guidance is one that you could beat over time and respond with agility, especially when your product is hitting home to the consumer depending on where -- how the consumer is at any point of time. And so that's really what drove it.

So what are the upsides, if at all? One is we assumed tariffs at the old rate of 19%, 20%, not at the 10% today. That upside is about $35 million balance of the year and $0.07, as Michelle said. Obviously, there's an upside in '27. There is $80 million of tax refunds based on what tariffs we paid. That's not incorporated. We were asked a question earlier by a large institutional investor, whether that means you'll have more cash to return back to the shareholders. And our view is our investment needs for the year already factored in, right?

So if there is more cash, that's something we'll work with the Board and think hard about because we have done that with Dockers, the sale of Dockers. We returned all that cash back. And so as we think to your question about the balance of the year, Q2, I think, is appropriately reflected. I mean there is that change because of the distribution ramp-up in Europe last year. And the second half is prudent. I mean, second half, I mean, you do the math, you say, "Oh my God, you guys are slowing your trends." But we are not slowing the trends. There's nothing that we're looking at and say, "Oh my God, trends will slow." It is just being cautious about the outlook. And so that's the way we're thinking about it.

Yes, we have locked in with oil rising. We have locked in the base contracts for ocean and for air freight through early next year. There are some surcharges depending on where oil is. We are working through managing that as a question. The other thing that we're really focused on because we heard it from all investors here and from the sell side is drive higher flow-through on incremental revenue. And you were with a bunch of leaders a couple of years ago. We bring 250 leaders together, and we just finished that a month ago. Flow-through and SG&A management was a prime topic.

People understand the playbook. And the things we are doing because it's not just going to happen by chiseling away at cost. We've got a couple of things. One, we're leveraging AI big time. We've got about 700, 800 agents right now, really focused on 2 things. How do you improve the consumer experience, but more importantly, how do you drive more operational efficiency. Headcount is flat despite a growing business, right? And then we've got these global talent hubs around the world where we're saying, let's take processes in different parts of the world and really drive efficiency. So we've got a few things on the cards, and that's what really drives the second half of the year or the next 3 quarters.

Michelle, if we think about the mid-single-digit organic top line outlook for the year, maybe if we could just break it down by what you're seeing across the regions. Where are you excited? Where do you see the most opportunity?

Well, we see opportunity across. And when we -- so we have the road map that takes us from in the 6s to $10 billion, hopefully beyond at some point. And you can map that growth by gender. So we expect to continue to see growth in men's, but we will expect to see outsized growth in women's. Think about women's, 11% growth last year. Q1, we just reported 13%. So it's at a new level, right? So that is a big chunk of the growth. Second, the other way we look at it is category. So continue to have nice steady growth with denim bottoms, but then also layer in non-denim bottoms and then layer in all these categories in tops and denim lifestyle. So you can ladder -- get to your $10 billion that way.

And then to your question, we also have the build by geography. And we expect -- so as we guided this year, we haven't guided further out. So I'll stick to the narrative. But for this year, we expect Europe to be in the mid-single digits. We talked about the Americas being in that probably low-single digits. Hopefully, we outperform there and then Asia, high-single digits. And you think about especially Asia, we are really underpenetrated there. And we both go back and forth there a lot to see the opportunity. And every time we go, especially in markets like India, I mean, we're just scratching the surface.

Japan has been on fire. China. So we -- it's been a long time since we've seen China grow. China was up 8% this quarter. So we feel like we're not going to take a victory lap, but we are seeing the green shoots with a new management team, with a tighter assortment, frankly, taking the playbook that's working for us around the world. And the last one, I would say back to the Americas, Latin America. ton of opportunity there. Mexico is our second biggest country as it relates to Levi's, and there's still upside. So that U.S., our most mature market, you're seeing the U.S. grow. We're up 4% in the quarter.

I mean you can go on. And then lastly, just on Europe, I just got back from a trip there. And even in established markets like I shared on the call, Italy, which is sort of the bar on fashion and a bit of a Mecca, we're growing really strongly there, and that business has doubled since 2021. So we just look across and we literally have it mapped out in terms of where we can find the growth. A lot of that's going to be fueled by DTC continuing this comp growth that we're now sharing comps officially. So you can expect to continue to hear that from us. It was 7%. We see a lot of productivity gains that can happen still like we're pleased with as much comp growth that we've generated the last couple of years.

But we benchmark ourselves to others, and we say there's still a lot of upside there. Of course, we're going to build new stores. We've guided 50-ish net new this year. That continues to be upside. E-commerce across all these geographies. And then I'll end it with what is supporting all this growth, of course, is the product, how we show up in all these places, both in wholesale and in our DTC channels and being a brand-led company and making sure that we're staying connected to our consumers around the world.

For me, gross margin, I think we've talked in the past about in the algorithm, is 30 to 40 basis points a year the right algorithm? Or what are the puts and takes on margin?

I think -- so I mean, let's say, Q1, let's start with Q1, right? And so Q1 was where we saw the full impact of tariffs relative to a year ago because I think it was around this time last year when we -- 2nd April and Liberation Day. So the way we've kind of -- our strategy to offset the tariff impact is working. We took some pricing. We leaned into lower product cost with our vendors, SKU rationalization, more vendors, et cetera, and driving higher full price sales.

So if you break up Q1, I would say -- and we had a little bit of an FX headwind that largely offset tariffs. Q2 tariffs will be offset by the actions we're taking. There's a bit of FX headwind in Q2. That's really driving the decline, but tariffs should be offset with the actions and then acceleration of gross margins end of the year. So we did raise our gross margin guidance for the year from flat to slightly up. To your question about what's the regular cadence of tariff -- of gross margin accretion, 30 to 40 basis points is natural. It's just driven by the business model. What we are trying to accelerate growth to and succeeding is gross margin accretive.

So women's is gross margin accretive. DTC is gross margin accretive. Men's -- sorry, international is gross margin accretive. Now if -- and when our tops business, which is right now we sell 2 bottoms to 1 top, and we had -- our target is to get to 1:1, right? Like we saw in the women's business, which was dilutive to gross margin, we're not selling enough, now it's accretive. Our view is that tops right now slightly dilutive to margins because we don't have the volume. But when we are able to get the volume, our view is that could be at par and I haven't built that into that equation. So there is clear opportunity. And full price selling, we have a bit of an option. There are some trigger points from that perspective.

So relative to the 12-ish percent margin this year target, fair to say mid-teens target on track over a multiyear period?

Yes. So the best way to break it up simplistically, it's never this simple. But if you take the 12% to the 15%, what's the road map? If you -- I mean, one is gross margin accretion, 30 to 40 basis points a year. So on a 5-year basis, that's 200 basis points. The second is this real focus on flow-through and the company being a mid-single-digit company on a sustainable basis drives leverage in SG&A. We haven't talked distribution. Distribution costs are slightly north of 7%. You've got a whole activity on remapping that. We think we can get a point.

So in that SG&A, you said probably 100 basis points of leverage, 100 basis points of distribution. That is more than 16%. Our view is because we're a brand-led company, maybe we can invest a little bit more in advertising, right? Other companies have done that. If you're reaching out to more consumers, so that's your path to 15%. Our EBIT margins were 9% in '23. We'll close this year closer to 12%. So we are on track.

And we talked about cash, just how you're thinking about capital allocation priorities?

Sure. I think the best way to think of capital allocation is 3.5% to 4% spending that on CapEx, 2/3 of that to grow the company, open new doors, e-commerce, some AI investments and about 1/3 in what I call infrastructure maintenance. So that's your piece, dividend-paying company. We increased dividends probably 8%, 10% in line with net income. That continues for a while. And then buy back stock to offset dilution. And if there's more cash like it happened in the last couple of years, return that back to the shareholders.

Maybe before I open it up to some questions in the audience, Harmit, with all of the momentum and everything that you guys are building, why leave us now, if it's for golf, you better be recording your scores. I need to see that hand.

Correct. And you're still better than me in golf, but we'll figure that out. But there's never a good time, especially when the business is having the sustained momentum. But I've been with the company 13 years. I'll probably leave when I'm closer to 14, we are finding our -- my successor and making sure he or she lands well, et cetera. I think the company is in a real good spot. Michelle has been on board for a couple of years. We've got a great executive team. The business has momentum. I have a fantastic team, some of who you've talked to, right, over the years because I said, let's get public ready.

And so I think those are the factors. I mean people have asked me, Harmit what are you going to do? I mean I don't think I'm going to be on the golf every day. But the way I think about it is I want to do what I love to do, which is build and transform businesses now with a bit of an AI experience. The second is I love to work with people. So I want to unleash the talent of the folks that I work with and spend some time with the family. They were like, okay, Harmit, it's time to spend a little bit more time. So that's the way one is thinking, but I'm here for a while. I've got a couple of quarters, definitely a quarter to deliver. And then Michelle and the team can -- we'll high-five and pass on the baton to whoever takes us to the next level.

Maybe we'll open it up to the room for -- there's microphones on each of the tables.

Okay. Harmit, just congrats on a great run. I had a question around GLP-1s actually. So I remember during COVID, you guys were very vocal about something like 35%, 40% of waist sizes have changed. There's this balloon pants trend. This time around, it seems like the societal impact, the weight loss impact is bigger than that time and it could be more sustainable, but I haven't heard you guys talk about it as much. So I'm curious if there's anything you could share if you see it as an opportunity. Obviously, like the category lends itself to weight loss or weight changes, right, skinny jeans, baggy jeans, that kind of nomenclature. So just curious like what the opportunity is there.

Yes. So we've asked the question a lot. We have not gotten a definitive or conclusive answer that, that is fueling our growth. We will happily take the demand as consumers shift sizes. We might be seeing a little bit of it in our Beyond Yoga business because we have seen a shift to some smaller sizes. I mean, obviously, that's a much smaller business for us. But kind of broadly speaking, hard to pin that down, but that's been a major factor. But we're looking, we're studying it. And like I said, we will -- we're more than happy to fulfill that demand.

But we haven't seen like an overall dip in our waist sizes in Levi's, we have not seen a shift down to make that more conclusive. But I could say, are people entering the category and are people shifting sizes and then it averages out, there could be that dynamic. But just from a data standpoint, our average waist sizes have not shifted, but we are seeing a little shift in Beyond Yoga.

And the only thing I'd say is accessibility to the globally is happening -- has happened recently at lower price points. And so that's upside. If it happens, it's up -- so it's difficult to build into models, but it's a great question.

How about on the AI front? Maybe, Michelle, how are you implementing it into the company on a dailyl basis? What are you thinking about longer term, how it could impact the business? And then maybe, Harmit, from a cost perspective, what you think it might mean? And I'm guessing it was not in the 15% target as you initially constructed it.

Yes. I can start off. I will say it's, for me personally, a huge priority. And going back even a couple of years and seeing -- I mean, AI has been happening for a long time, but sort of as it hit this next curve of opportunity and capability, myself, Harmit, the team, we have been all over it and making sure that we are working with all the right partners, and we are working with the big and the small to help us in our journey. The 2 priorities that we have with AI is how can AI enhance the consumer experience and then how can AI help us drive more efficiency in the business.

On the consumer side, we've got a lot of experiments happening. I've been really excited to lean in and be piloting ways to help the shopping journey. So if you think about the online experience, we do -- we have AI embedded in the core of even if you go on levi.com today, enhanced outfitting, enhanced personalization, the overall experience is better. The challenge I've had with the team is how do you take that to the next level. We all know when you're personally playing with ChatGPT or Claude or whatever, I mean, all kinds of recommendations that can come up with.

So think about a day where you do have the shopping agent, we call it Indigo, where it knows you so well, it can proactively ping you on new drops. You don't know what to wear to a concert this weekend. It knows what's in your closet. So it's going to tell you, well, if you say, I'm Matt, I'm going to this concert. I'm going to go see Ed Sheeran. What should I wear? And it will say, okay, well, you already have those 501s, and here's a great top, here's a great T-shirt, here's a great trucker.

So not only like saying maybe a complete outfit, but it's also going to know what's in your closet. So you just think about that proactive and reactive engagement. We're in pilot -- we're actually in pilot stages right now. We're testing it on our employees first because as we all know, you got to figure out, okay, how is this thing really going to operate, get the bugs out. But I see that in the near-term horizon. And then I can hit the efficiency, and I'll hand it over to Harmit, too that we have so many case studies across the company on how we are looking to have AI drive efficiency.

It's in everybody, all of our leaders' goals. And I mean, I could take any department and they probably have 10 to 15 different ways they're using AI from marketing to legal, to merchandising, I mean design. We're working with a couple of really interesting platforms on how it doesn't take the creativity out of the designers, but how can you drive, okay, it used to take me a whole day to sketch this. I can do this in 10 minutes. It's going to give me 100 different options as well as process automation. So we see a big opportunity.

Yes. I mean the best way to -- putting on my CFO hat, the best way to handle this is constrained dollars, right? So we said no incremental dollars for new headcount. So with a business that's growing and half the growth is coming from volume, the opening of new doors, et cetera, that means, okay, you've got to reallocate your dollars differently. And people need to raise. So what we said to the leaders when we brought them together a month ago is we're keeping headcount flat. If you have X priorities and now you have new priorities, find a way to trade that off.

As people leave, we've got this global talent hub, think of taking processes there, et cetera, et cetera. I'll give you a use case that's part of my team. Wholesale is a big piece of our business. We get orders in from customers. 20% of the orders are manual. The rest is electronic. I have folks in my team who actually input those orders. It takes them 2 to 5 days. There is a 10% accuracy factor that's now happening in 15 to 20 minutes, right? So it's happening really fast. We have tested it out. We're rolling it out in the U.S. And now the folks -- so as orders grow, we don't need to add people.

But the same folks, we're helping them to skill up so they can call our customers and get the checks back. So it will just lead to a different way of doing things. And that's how we -- so we've taken these use cases. And a lot of these use cases, the brilliant part of it is they've been created by folks within the company. And so the HR team is working on how do we lean into upskilling. We are working on how do we take these agents and change the way we work and get a lot more efficient. So we're building through that. I think it's a journey. It doesn't happen overnight, but we're long on this.

Yes. I got a couple of questions. First of all, when you talk about licensing at all, tremendous amount of manufacturers that really want to license you that you already have, so that's one question. Another one on marketing. We've seen in denim some real celebrities market. Is that in the future potential also? I'm not saying Sydney Sweeney, but some people like that. Another question as far as on the premium denim, as you go into higher price points, tell me -- give me an idea of the differential between that Levi where it's going versus where the designer guys are.

There still is a major gap and the other question #4 is when it comes to selling denim, the most important thing is that the customer finds the size and the -- which means not only the waist size, but the length in stock. And there seems to be tremendous innovation taking place there where some retailers are getting weekly deliveries of the fill-ins as they sell them out because they're using these ones to want the entire inventory and transmitting it to you. So that's helping a lot, I think. So maybe talk about those 4 things. I don't know.

Four questions. I can remember. I can start with the marketing.

I'll do the Blue Tab piece because I'm wearing an example.

Yes. So we're doing that, Danny. So we -- I think we actually set the trend, if you will, that others have followed. We've done that for a long time. And if you think about last year with our Beyonce campaign, which was phenomenal, that came out of Beyonce naming a song after us, Levi's jeans. I mean, definitely in the category, you sort of can't make it up. And we leaned into that. So she does the song, our Chief Marketing Officer, myself, we reach out to her team. Let's see if we can make something work. And then we had this amazing campaign. And I mean, Beyonce is one of the most celebrated artists of our times, right?

So we hit the jackpot with that one. And she's been a great partner. In fact, Levi's and Beyonce have been friends back through the '90s. Our campaign that's running right now, which I mentioned we launched on the Super Bowl, does tap into global and local influencers. So -- and right in that core consumer target of that 20- to 30-year-old. So Doechii, the basketball player, SGA, Rosé, 90 million Instagram followers becoming a global icon in their own right, part of Black Pink. Now she's gone up on her own. And we're now doing a collaboration with her that's starting off in Asia, multiyear collaboration may go forward.

So our team does a fantastic job. And you can see it if you follow our handle on Instagram of both the local and kind of macro culture as well as the micro cultures of driving relevance. So we say we like to operate in the center of culture, but we really shape culture. And I think what's really exciting for this year, Matt, some of your earlier questions on how do you support that tailwind. Coming off 7%, now we deliver 9%. We just raised our top line guidance, held some back just in case things get even more uncertain, what have you. But we've got a whole lineup of marketing activity this year.

We just did Super Bowl. We're hosting multiple World Cup games. We just yesterday announced a partnership with a company that really brings out emerging artists. So we're hitting it across fashion, culture, sports and music across the board. So more goodness to come on that front.

Yes. So a couple of things. You asked licensing. Our kids business is all licensed. We've got a great partner globally. I mean it's a business that we -- when we look at it, we say it's not our -- it's important to get the kids into Levi's, but it is best handled by a partner who does it as an example. And so that's -- your question 3 was on Blue Tab. Last year, we tested it in a few markets because we just want to be comfortable or we want to make sure the consumer is comfortable paying 2.5x what a Red Tab is, right?

So you go to our stores, it's between $80 to $120. Blue Tab is about $250 to $300. So I'm wearing the Made and Crafted. I bought it in China. It was Made and Crafted 2 years ago for $250. Now you walk into a store, the same Made and Crafted is now rebranded as Levi's because it was really Made and Crafted as sub-brand, and we are selling that across the world. This blazer is in that -- in and around that price range. But the consumer is giving us the permission based on our testing to expand it because the product is very differentiated.

We have to do a better job storytelling it. That's why we're testing it before we scale it. This year is an expanded test and next year is about rolling it out. So that's your third question. Your fourth question was, yes, sizing, huge opportunity, continues to be. We've got -- we're using RFID, so people can understand it. So I'll give you an example. I think last year, we were all in Dallas. We were not playing in Texas. Now we got our full-price stores in Dallas. A wonderful 3,500, 4,000 square foot store, hitting the ball out of the park, but no -- I'm a 34 in-seam.

We don't sell 34s because they can't stock it. But as we are reducing our SKUs and rationalizing it, we are saying, let's get the right sizes in, right? You can still buy it. You just have to do it on an iPad because it's available in some distribution center. So it's clearly an opportunity. It's something we're working on. Now we have the technology, and we are rationalizing SKUs to make sure we are able to make .

On the licensing, I meant like outerwear also, footwear. I mean there's a lot...

Dabble with, what should we do with footwear. The way we have landed in footwear, I'm wearing the Air Jordan collaboration, $800. But -- in case, our view on footwear and Michelle, feel free to jump in. When we thought about denim lifestyle, we did look at categories that we want to lean in and categories that we've got other experts doing a better job. And footwear is a category we said we will collaborate with experts, New Balance, Nike versus drive more footwear versus having a partner out there licensing under our brand. We have tried licensing footwear, quality, not great. And so we leaned in and said, we had a small footwear business in Europe, $100 million, $150 million business, we exited that and said we're going to grow footwear, but do it thoughtfully and high quality.

Outerwear, as we start growing our outerwear categories, we'll take a look at that. But in the U.S., wholesale is largely licensed. Our own stores, that's outerwear, we kind of manufacture ourselves. Rest of the world, we do it ourselves. So those are the things we look at. We've got some great partners. They do a phenomenal job. Why distract ourselves? We've got enough to do, and those things are working so.

I'll amplify that. I mean strategy is about focus. We've made tough decisions, including selling Dockers, which have been part of the company created by the company in the '80s. So there will be surgical opportunities, but we see so much opportunity with the categories we've talked about, premium denim, Red Tab denim, Signature and then head-to-toe denim lifestyle in these tops categories that today, we're just scratching the surface. So that $10 billion is real, my friend, Matt.

Michelle, Harmit, thank you for your time and congrats on the success.

Thanks, Matt. Thank you.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co's. First Quarter Fiscal 2026 Earnings Conference Call for the period ending March 1, 2026. [Operator Instructions] This conference call is being recorded. and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com.

I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2026. Joining me on today's call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer.

We'd like to remind you that we will be making forward-looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results.

Definitions of these measures and reconciliations to their most comparable GAAP measures are included in our earnings release available on the IR section of our website, investors.levistrauss.com. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers, unless otherwise noted, and the information provided is based on continuing operations. Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly.

Today's call is scheduled for 1 hour. So please limit yourself to 1 question at a time to allow others to have their questions addressed. And now I'd like to turn the call over to Michelle.

Thank you, and welcome, everyone, to today's call. I'm pleased to share that 2026 is off to a strong start. In Q1, we exceeded expectations across the top and bottom line, driven by every region and channel, underscoring the continued momentum of our strategies. As we've highlighted over the past few years, the strategic choices we have made to narrow our focus and maximize the potential of the Levi's brand are enabling us to pursue our highest return growth opportunities. We are becoming a more DTC-first denim lifestyle company, and it is leading to more consistent and faster growth, a much larger addressable market and higher profitability.

Today, we're operating from a stronger foundation. We're executing with intention, and we have more ways to win than ever before. Before I turn to our Q1 results, I want to briefly note a leadership update. Earlier today, we announced that after a planned transition, Harmit will retire following 13 years with Levi Strauss & Co. Harmit has been an exceptional partner and leader playing a central role in strengthening our financial foundation as we've accelerated growth, expanded margins and evolved into a more diversified direct-to-consumer business.

The disciplined systems and high-caliber finance organization he built have positioned us well for long-term success. We've initiated a comprehensive search for our next CFO with the support of a leading executive search firm, and Harmit will continue to serve in his role until a successor is appointed. He will remain for a planned transition as an adviser to ensure continuity.

Given the strength of our leadership team and the momentum in the business, we are confident in a seamless transition and remain firmly focused on executing our strategy and delivering sustainable profitable growth. Let's now turn to the details of the quarter. As a reminder, all numbers Harmit and I will reference are on an organic basis. We generated another quarter of high single-digit organic net revenue growth, up 9% and up 14% on a reported basis.

We delivered double-digit top line growth in both Europe and Asia and 7% growth in the Americas. We drove 10% growth in the DTC channel with comp sales up 7%, reflecting strong underlying demand. Our wholesale channel exceeded expectations, delivering 8% growth, fueled by strength across segments. Growth in women's continued to accelerate, up 13% in addition to 7% growth in men's.

Our evolution into a head-to-toe lifestyle brand is fueling accelerated growth in tops, up 13%. And while we drove significant top line growth, we also exceeded our adjusted EBIT margin expectations and delivered double-digit earnings growth in the quarter. This strong early performance gives us confidence to take up our full year guidance. I'll now walk you through highlights from the quarter in the context of our strategies.

Let's start with our first strategy, being brand-led. The Levi's brand was up 9% for the quarter as we continue to keep the brand firmly at the center of culture. Few brands can authentically play across so many facets of culture, sports, fashion and music in a way Levi consistently does, and this was on full display during the Super Bowl.

Leading up to the game, we turned the Bay Area into Levi's home turf with a full 360-degree activation, including exclusive product drops and live music as well as hands-on workshops and in-store celebrity and athlete engagements. We also launched a number of exciting collaborations, including a new Nike apparel capsule, and denim Nike Air Jordan 3. We extended that energy during the game itself, launching our new global campaign behind every original designed to unfold in chapters throughout the year.

Premiering during one of the most watched moments of the Super Bowl, early results have been very encouraging, with strong awareness, brand equity lifts and more than 1.4 billion media impressions generated in February alone. Featuring global brand ambassadors, Doechii, Questlove, BLACKPINK's ROSE and Basketball Superstar SGA, the campaign has been recognized among the top Super Bowl ad by outlets, including Forbes, Ad Age and Fast Company.

Building on the strong momentum from our campaign, we announced a multiyear global partnership with Rose, including new co-created pieces that will come to market later this year. And a prime example of Levi is showing up organically at the center of culture is Harry Styles wearing a pair of Vintage 501s on his new album cover and his backup dancers, all wore 501s on stage at the Brit Awards in February.

Now turning to product where we continue to see strong growth in men's and women's and across tops and bottoms, fueled by innovation and execution. First, let's start with our bottoms business, which was up 7%. We're infusing newness across the assortment with innovative fabrics, fits and finishes throughout both our icons and fashion styles. Within core bottoms, we continue to introduce modern interpretations of our ICONIC 501 like our very popular 501 '90s and 501 Curve for her. And for him, the 501 Loose and 501 Thermodapt, our new climate adapting fabric innovation.

Another great example of the organic strength of our core is the 25% increase in our Iconic 517s which were famously warned by Carolyn Bessette and prominently featured in the popular show Love Story. Our newer fashion forward fits across loose and baggie styles continue to deliver outsized performance. We're following the tremendously successful launch of last year's women's Cinch Baggy with an expanded assortment of Cinch Wide Leg, barrel, shorts and more.

And for men, we introduced a new Baggy Barrel Fit, which continues to drive fashion relevance for him. Our push into categories beyond denim bottoms has expanded our total addressable market and contributed to roughly 1/4 of our top line growth with still much more opportunity ahead. Tops continue to be an important growth driver as we build out a more complete lifestyle offering. In men's, we saw continued success in Polo, button downs in our newly launched quarter zips. And in women's tops, wovens, blouses and sweaters were standouts, along with our expanded selection of Ts.

Dresses also continued to perform well as a natural extension of our lifestyle strategy. We've sharpened our product strategy by shifting toward a more globally directive assortment. In our DTC business, we've increased product commonality to nearly 50% today. This shift has driven greater productivity through SKU reduction and enabled us to focus on fewer, bigger product stories showcasing our head-to-toe collections. As a result, we're showing up globally with more impact and consistency and with clear storytelling and stronger alignment across markets.

A great example of this was the Q1 global launch of our head-to-toe grunge prep collection. This new aesthetic combines preppy tops like cable crewneck sweaters and Rugby Ts, which worn in grunge textured bottoms cross-fit, like our 578 loose and baggy loose cargo pants.

Blue Tab, which is the most premium expression of the Levi's brand, delivered robust growth in Q1, reinforcing our confidence in this business. We expanded the assortment, adding more women's product and lifestyle pieces while maintaining a solid foundation in premium denim. With just 1% market share of the $10 billion total premium denim market, this represents a sizable long-term opportunity for the Levi's brand.

As we look to spring and summer, our global product assortment will continue to deliver against our big ideas with a unified lens. We will build on the momentum we're seeing today by expanding lightweight and linen blend product across tops, dresses and bottoms, while also leaning into short shorts and other warm weather lifestyle pieces. Now shifting to our strategy to become a best-in-class DTC-first retailer.

Our global direct-to-consumer business delivered double-digit growth, up 10% in Q1. Comparable sales were up 7% this quarter on top of high single-digit growth last year. This marked our 16th consecutive quarter of positive comps as we continue to raise the bar on our retail execution. We've strengthened lifestyle merchandising and outfitting in stores improved in-stock positions through better assortment planning and invested in training our team with a new global selling model.

In the quarter, e-commerce delivered 17% growth reflecting continued momentum as we elevate the online experience. Digital plays an important role in how consumers discover the brand and build a deeper connection with Levi's. Importantly, newer consumers engaging with us through e-commerce continue to skew younger. In Q1, 70% of new U.S. e-commerce orders came from Gen Z and millennials.

This reflects our ability to connect with younger consumers as they enter the category, driven by product newness, lifestyle-led storytelling and a more dynamic digital experience. Our loyalty program also continues to be a powerful driver of consumer engagement, reaching 46 million members globally, up 17% year-over-year with more than 2 million new members added in the first quarter. Loyalty members spend about 40% more with higher transaction values and purchase frequency than nonmembers. Global Wholesale continues to be an important part of our business to reach consumers around the world.

Results this quarter were better than expected, up 8%, driven by strength across segments. The growth in wholesale reflects the momentum behind our lifestyle assortment, the strength of our partnerships and our commitment to reaching Levi's fans wherever they choose to shop. Now turning to our third strategy, powering the portfolio. Our international markets continue to demonstrate strong momentum, up 12%. Europe grew 10% in Q1 with growth across most major markets.

Having recently visited stores across Europe, I got to see firsthand how strongly consumers are responding to our elevated denim lifestyle assortment. One of the markets I visited was Italy, which plays a unique role as a premium halo for Levi's across Europe, shaping brand perception well beyond its borders. As a global center of fashion and culture, we have elevated our presence in the market and revenues in Italy have nearly doubled since 2021.

Importantly, we have continued to strengthen our #1 share in denim bottoms across both men's and women's in this market. In Q1, our value brand Signature grew 16% reflecting impressive performance in women's. Over the past year, we have revitalized signature through a product and brand reset, introducing compelling newness and expanding into lifestyle categories. This is translating into share gains for the brand within key wholesale accounts, a clear signal that the revitalization is resonating with consumers. Beyond Yoga was up 23% with DTC continuing to show solid momentum.

The brand expands our addressable market into premium activewear, complementing our denim lifestyle portfolio. Our recently launched Seek Beyond marketing campaign and broader product offerings are gaining traction with consumers and fueling growth. While we continue to invest in the business, our operating loss narrowed in the quarter driven by strong top line growth and gross margin expansion, reinforcing our path toward profitability.

In closing, the quarter reinforces the significant progress we're making against our strategy. We're seeing the impact of becoming a more brand-led consumer-centric DTC-first lifestyle company with broad-based strength across our business. The work we've done to sharpen our focus, elevate the Levi's brand and operate with greater discipline is translating into higher quality, more profitable growth, while building a stronger foundation for the business. While we remain thoughtful about the external environment, we're confident in the direction we're headed as we move through the year and beyond.

With that, I'll turn it over to Harmit to walk through the financials and our outlook. Harmit?

Thank you, Michelle. I wanted to take a moment to speak about the announcement we made earlier today. After 13 years with the company, I will retire following a planned transition. This company and our people have meant the world to me and has been a true privilege to work alongside Michelle, our Board and all our shareholders and the extraordinary leadership team as we have transformed this company into a more diversified global direct-to-consumer business.

I'm incredibly proud of what we've built together, from accelerating our growth, transforming the company into a DTC-first retailer while expanding margins and returns. What gives me the greatest confidence as I look ahead is the strength of my team and the deep talent we put in place. I'm so grateful for the support of me and the company. I'll remain fully engaged as CFO and Chief Growth Officer until a successor is appointed and stay for a planned transition.

LS&Co. is stronger than ever and I have every confidence in the company's continued momentum and ability to deliver long-term profitable growth. Let's turn to quarter 1. We delivered another strong quarter, marked by high-quality, broad-based growth and stronger-than-expected profitability. Our first quarter results reflect the power of the [indiscernible] while our top line outperformance this quarter was driven primarily by better-than-expected wholesale performance. DTC remain healthy. More broadly, every facet of our business has contributed to growth over the past 6 quarters, wholesale and DTC, U.S. and international. Women's and men, tops and bottoms, units and AUR. Our focus on improving flow through that is converting a higher percentage of revenue into profit enable us to exceed our adjusted EBIT margin expectations and deliver higher earnings.

As planned, we leaned into A&P earlier in the year to support the launch of our '26 global campaign. Normalizing for this timing, adjusted EBIT margin of 12.5% would improve 160 basis points to 14.1%. While we continue to take a prudent approach to planning for the balance of the year, our strong first quarter results and positive quarter-to-date trends position us to raise our expectations for revenue margins both gross and adjusted EBIT margin as well as adjusted diluted EPS.

Turning to the details of the quarter. Net revenues were up 9%, with broad-based trend across all segments and channels. Our international business contributed to about 75% of our growth. Women's accounted for approximately 55% of total growth. DTC accounted for just over half the growth. By category, tops drove roughly 1/3 of our growth in this quarter and growth was driven equally by higher volumes and higher AUR.

Given the ramp-up of our distribution center in Europe last year, shipments moved from quarter 1 to quarter 2. As a result, quarter 1 '26 revenue growth benefited by approximately $30 million or about 2 percentage points. This will have an offsetting impact in quarter 2. Excluding this timing shift, quarter 1 still delivered high single-digit growth. I'll address the impact on quarter 2 in our guidance.

Gross margin for quarter 1 was 61.9%, slightly better than external expectations, contracting 20 basis points year-over-year, primarily due to tariffs. The decline in gross margin was partially offset by pricing actions and lower promotional activity. We continue to closely monitor the consumer response to pricing actions and to date, we have not seen an impact on demand. From an input cost perspective, we have locked in ocean freight rates and secured cotton at favorable levels for 2026.

Adjusted SG&A grew 16%, driven by higher A&P, the higher-than-expected sales volume and foreign exchange. Excluding the 160 basis points impact of A&P, we delivered 90 basis points of leverage across the balance of the business. We still expect marketing as a percentage of sales to be approximately flat year-over-year at around 7%. Improving grow-through remains a key priority, and we are taking deliberate actions to deliver it.

Across the organization, we are leveraging our global talent hubs and accelerating productivity through expanded AI initiatives, allowing us to support our growing business while keeping overall headcount flat year-over-year. At our recent Leadership Summit we aligned our top 250 leaders around tighter SG&A discipline and a sharper focus on converting top line growth into consistent profitability.

And importantly, our leadership team's incentives are directly aligned with driving both revenue growth and profitability. With respect to the status of the U.S. distribution network transformation, execution continues to progress and notably, distribution expenses versus prior year improved as a percentage of revenue. We are working towards completing the transition by midyear and costs we expect to incur are factored into our updated guide.

Longer term, this transition positions our network to support omnichannel growth and drive efficiency. Adjusted EBIT margin was 12.5% in the quarter. Excluding the A&P investment, adjusted EBIT margin would have been 14.1%, substantially higher than last year and reflecting flow-through of approximately 40% from the higher revenue. Adjusted diluted EPS was $0.42 ahead of our expectation and up 11%. We ended the quarter with reported inventory dollars up 4%. We're comfortable with the quantity and quality of our inventory as we enter the spring season.

Turning to shareholder returns. We took another important step forward this quarter with the successful closing of the Dockers transaction, which further simplifies our portfolio and sharpens our focus on the Levi's brand and Beyond Yoga. our adjusted free cash flow in quarter 1 '26 was also substantially higher than last year at $152 million. This, along with the net proceeds from Dockers sale enable us to return cash to shareholders through share repurchases.

In total for the quarter, shareholder returns were up 163% to $214 million. In quarter 2, we declared a dividend of $0.14 per share, an increase of 8% year-over-year. Now let's review the key highlights by segment. The Americas net revenues were up 7%, driven by 4% growth in the U.S. and 14% growth in LATAM. This was fueled by strength across DC and wholesale channels. U.S. wholesale was up this quarter even with our actions to rationalize certain customers.

The acceleration in LATAM was driven by double-digit growth across every market, including Mexico. Operating margin contracted 260 basis points due to the timing of A&P and the impact of tariffs. Europe grew 10% with solid demand and strength across markets and channels as consumers continue to gravitate towards our head to toe offerings. Operating margin expanded 50 basis points, driven by gross margin expansion.

Given the distribution transition we are lapping in Q1 and Q2 of '25, it is best to look at Europe on an H1 basis. we expect Europe to grow mid-single digit in the first half of the year, consistent with our guidance for the segment. And importantly, prebook for the fall and winter season is up high single digits. Asia grew 12%, fueled by growth across both channels, led by DTC, which was up 16%. Key markets like India, Japan, Korea and Turkey delivered strong results across channels and categories.

China was also positive, reflecting early progress and green shoots under new leadership as actions to reset the business begin to take hold. Gross margin expansion and SG&A leverage drove 150 basis points of operating margin expansion. The Middle East, which is part of our Asia segment, represents about 0.5 point of total company revenues and is mostly operated as a distributor model.

Now turning to guidance. '26 is off to a strong start. And as a result, we're raising our outlook across revenue, margin and earnings while maintaining a prudent view on the macro environment. As a reminder, our guidance assumes incremental U.S. tariffs on imports from China at a 30% rate, and the rest of the world at 20% and therefore, does not contemplate the recently announced Supreme Court ruling or the administration effort to reimpose the tariffs.

While this has not been incorporated into our guidance, if the 10% tariffs currently being charged stay in place for the rest of this fiscal year, we believe there could be an incremental benefit to our current outlook of approximately $35 million to COGS and $0.07 to EPS. For the full year, we are raising our expectations for both reported and organic net revenue growth by 0.5 point. We reported growth to be up 5.5% to 6.5% and organic revenue to be up 4.5% to 5.5% for the full year.

The increase in our top line expectation is due to stronger-than-expected performance in the U.S. wholesale channel, and we now expect global wholesale to be up low single digits. Gross margin is now expected to be flat to slightly up versus our prior expectation of flat to prior year. Adjusted EBIT margin is now expected to be approximately 12%, up from our previous expectation of 11.8% to 12%. And we now expect adjusted diluted EPS of approximately $1.42 to $1.48, up from $1.40 to $1.46.

For quarter 2, we expect reported revenues to be up 4% to 5% for the quarter and organic up 3% to 4%. As I previously mentioned, growth in quarter 2 would have been higher by approximately 2 points due to the timing of last year's distribution transition, which reinforces that there is no change in underlying demand trends between quarter 1 and quarter 2.

Gross margin is expected to be slightly down due to unfavorable foreign exchange. We expect to fully offset the impact of tariffs through our various mitigation efforts. Adjusted EBIT margin is expected to be in the range of 8% to 9%. This translates to an adjusted diluted EPS of approximately $0.22 to $0.24. Let me provide some color on the margin cadence of our full year outlook.

Given our Q1 results and Q2 guidance, we expect H1 EBIT margins to be in the range of 10% to 11%, and we expect accelerated margin expansion in the second half year driven primarily by 4 factors. First, the normalization of A&P effectively pulling a point of A&P out of H2 into H1, behind the launch of our campaign, which was primarily expensed in H1.

Two, given the seasonality of our business, which is weighted more towards the second half, the incremental volume drives higher fixed cost leverage. Three, we will begin to realize the full benefits of our pricing actions which had not yet been implemented in H2 of last year. Fourth, lower distribution expenses as we ramp down the parallel distribution center. This positions us for an H2 EBIT margins to be in the 13% to 14% range, consistent with our full year guide of approximately 12%.

In summary, we delivered our sixth consecutive quarter of mid- to high single-digit growth driven by both our wholesale and DTC channels. DTC now represents about half our business and continues to be a significant growth driver. We reported 16 consecutive quarters of comp sales growth. And as you saw in this quarter's press release, we reported comp growth of 7%. We will continue to report comp sales as part of our regular disclosures. We raised guidance, reflecting our momentum and execution against our strategies while maintaining a disciplined, balanced approach to the full year. Michelle, I and the entire executive team are committed to flowing a higher percentage of revenue to profitability, solidifying a clear path towards a 15% EBIT margin over time. And with that, I will now open up the line for Q&A.

[Operator Instructions] Our first question comes from the line of Laurent Vasilescu of BNP Paribas.

Michelle, Harmit, congrats on a great start to the year. And Harmit, I want to quickly say it's been a real pleasure working with you over the last few years. So Michelle, can you talk about what's driving the momentum in the business and how confident you are in sustaining that momentum, particularly with the uncertain macro backdrop in Europe and North America, which I think everyone is really laser-focused on.

And then Harmit on SG&A, thank you for unpacking a little bit on the SG&A growth up 16%. I saw in your 10-Q tonight, distribution expenses actually went down for the first time. How should we think about these distribution expenses and overall expenses for the balance of the year to get to that 1H-2H operating margin that you laid out?

Thanks, Laurent, and thanks for the questions. So I'll kick it off, and I'll hand it over to Harmit. So first off, we're really pleased to start the year so strong with, of course, a beat on the top and bottom line. But the 9% organic growth, 14%, it was high quality and directly linked to the execution of our strategy.

We saw the growth broad-based across segments, channels, genders and categories. And just to share, like if we take our -- one of our key strategies, which is this pivot to denim lifestyle, we saw outperformance in the women's business, up 13%. We saw outperformance in top of 13%, which really demonstrates that we can grow our addressable market. And while we did this, call it the core of our business in men's and bottoms, both feel really strong at plus 7%. So strategy number one. Second strategy on this, we are becoming a best-in-class DTC retailer. DTC is continuing to fuel the growth. It was up 10%, 7% comp growth. We're very pleased to start sharing that number, and our wholesale business grew as well at up 8%. So again, this is about execution.

And as we look ahead, we see a lot of runway ahead to the second part of your question, in terms of sustaining the momentum. It's the cause and effect on executing our strategies and the consumer is responding. We are very cognizant of the environment around us. But our consumer is responding to innovation, newness and Levi's as a great value. So we'll stay close. But given what we're seeing in the business and how we started this quarter, we feel very confident and hence, why we were confident enough to raise our guidance for the year.

And Laurent, to your second question, first, I appreciate your remarks. I still have a job to do. We still have to deliver the year. So I'm around for a while. But to your question on SG&A, in essence, SG&A as a percentage of revenue was a little over 49%. We expect to deliver the year with SG&A as a percentage of revenue around mid- to high 49% lower than a year ago. Just unpacking this quarter, let's start with SG&A was up 16%. A&P was -- the timing of A&P because we are assuming that we spend only 7% of revenue by the end of the year was approximately 5% of that 16% increase.

Foreign exchange, it's interesting because of our global business when the U.S. dollar is weaker, which we have seen over the last couple of months, actually it's when you convert that into dollars, it impacts [ SG&A ], that's about 4 to 5 points. And the remaining 7 points was largely driven by volume, were driven by a little bit of inflation. And what we call as we expand DTC, we continue to open doors. So overall SG&A, we believe will continue to improve as a percentage of revenue.

The other thing that we -- because we've taken this to heart, which is we have to convert a higher percentage of revenue and profitability. And I share with all of you what we are doing as a team, bringing the 250 leaders together, talking about why flow through is important and how that acceleration of growth along with profitability really enhances and creates a lot of value for all our stakeholders.

Our next question comes from the line of Oliver Chen of TD Cowen.

Harmit, congrats on a really wonderful career. Regarding the guidance, it seems conservative given the [ 2-year stacks ] decelerate, and you've been posting better and solid numbers. Why wasn't the guidance higher in terms of the momentum you're seeing in the U.S. wholesale, which parts of that business were better than expected? And do you expect that momentum to continue? And as we look forward on the margin side, what should we know about mix as you continue to make so much lifestyle progress and/or what's embedded for promotions because it's not an easy environment out there, but you're experiencing a lot of innovation and gas is on everyone's mind on a near-term basis as well.

Sure. Oliver, 2 things is early in the year, we have a sizable beat. And while we haven't seen, even in quarter-to-date trends, any real change in trends. Our view is that be prudent in the outlook as we think forward. So that's really what's driving what we call a more prudent outlook.

The only other thing to think about is we haven't incorporated the reduction in tariffs which may come to pass at some stage, right? We've quantified it, but we haven't incorporated that, that gives us what I call contingency of cushion, should the environment change in any dramatic way. And so that's how we are thinking about it.

The real focus of the company, as Michelle pointed out, is to continue the momentum on the top line while converting a higher piece of that revenue into profitability. We have taken gross margins up for the year from what we said flat to -- flat to slightly up because we think we can fully offset the 19% increase in tariffs. We have taken EBIT margins up to the high end of the range, and we've taken EPS. So we feel generally positive from that perspective.

In terms of your mix, so your question about wholesale, what really drove the beat on wholesale. And it is true that 2/3 of the beat was largely driven by wholesale and it was largely in the U.S. and Europe. And the outperformance was really we're beginning to see what is showing up in DTC by driving denim lifestyle now get incorporated by our partners buying more women's. Women's growth in wholesale was really strong. They're buying more tops, that's making a difference. And the good news is there's still a balance between units and AURs even in wholesale.

So I think that's been the, I would say, the thought, which is start with DTC, prove it out and then showcase that so that your partners buy. And I think we're beginning to see it and it's still fairly underpenetrated. Women's in wholesale is underpenetrated, tops in wholesale is underpenetrated. And so I think those are the factors that really I think from our perspective, we believe there's a long runway for growth, a $6.5 billion company getting to $10 billion over time.

And Michelle, one for you. Just what's ahead on your thoughts on denim momentum? Because one question is if we're at a peak place in the denim cycle, but you're doing a lot and things are changing with baggy and head to toe. And as you embrace loyalty, the loyalty program in AI and personalization, how might you see that manifesting and what's happening with innovation.

You bet. I'll hit those quickly, the denim category remains healthy. It's actually accelerating here in the U.S. It's outperforming overall apparel. Clearly, as the leader in the category, we are fueling that growth through all the innovation and fashion cycles we're bringing. So we sit here today, again, we've contemplated that in our guide that we expect the momentum to our strategy is to continue and loyalty, AI, our e-commerce business, again, up double digit, and we are now leveraging AI tools to help that consumer engagement. Loyalty, again, as we shared in our remarks, is up, again, acquired 2 million consumers in the quarter.

Our next question comes from the line of Ike Boruchow of Wells Fargo.

Congrats, Harmit, we'll miss you. But a question for you -- actually, 2 questions for you, Harmit. Can you just clarify the commentary on Europe in the second quarter. So you're basically guiding Europe organic -- constant currency revenue flat in the second quarter. Can you just quantify the wholesale, the dollars that moved into 1Q that are moving out of 2Q just so we can smooth that out. And then to Laurent's question on the DC side. What's your expectation for the remainder of the year? You're already getting scale on that line item?

And it feels like a lot of the initiatives haven't really kicked in yet that should drive leverage. Just what's the expectation for leverage on that line item the rest of the year? And then how quickly could you potentially get that line item back to 5% of sales? Is that 4 to 5 years? Or is that more like 2 to 3 years?

Okay. So to answer your first question, which is Europe, I quantified it. It's about $30 million and is primarily wholesale. And so you can do the math, but that's really what -- and you're right, Europe up 10%, primarily flat in quarter 2. But for the first half, about mid-single digit, we're guiding Europe to be mid-single digit.

The other pleasing fact in Europe is that our prebook for fall and winter is looking at approximately high single digits. We're feeling good about the Europe business. The team in Europe is executing really well. And so that's really what's driving the -- that's the amount, and that's what's driving the shift. To your question about the transition of the DC, I mean just think of this broadly, I would say Europe transition that began about 1.5 years ago has stabilized.

You're seeing it in their results. We're doing more omnichannel fulfillment and that's making a difference. It took us a little while, but distribution costs in Europe now are scaling down as a percentage really well. U.S., we continue to be committed to reducing the transition cost as the year progresses, and we'll do it in a way where we prioritize the incremental demand that we are seeing with the costs incurred because we have seen volumes really pick up and fulfilling that has been great.

As I mentioned earlier, we continue to expect the cost of additional DC to taper off as the year progresses beginning in the second half and our DC that is being run by Merck -- by Maersk really stabilized. So to your question about when do we get to 5% distribution cost as a percentage, I won't comment on the timing, but what I will say is our new supply chain leader and the new distribution experts that we've got are committed to improve both the flow-through, so we drive higher volume throughput as well as lower cost over time and built into our plan is to get from 12% to 15%. So we are committed as an organization. It's a big piece of what we are focused on. So stay tuned.

our next question comes from the line of Jay Sole of UBS. .

Maybe, Michelle, can you just talk a little bit more about what you're seeing in the U.S.? And I think you mentioned quarter-to-date was good. We've been through Easter, how it's been? And then also, it sounds like the Super Bowl was a big event for Levi's. But I think Levi's Stadium is hosting 6 games for the World Cup this quarter. Are there plans around that? Will that impact SG&A? And what -- how should we think about that opportunity?

Yes, you bet. Thanks, Jay. So first, I'll take your question on the U.S. Pleased with the start of the year in the U.S. as well. We were up 4% in the quarter, and we saw both channels performing well. This quarter, especially reflecting the strong execution that we're seeing, both in our DTC channel, strength in stores and online, driven by enhanced merchandising, we're doing expanded lifestyle assortment, and I'll get you the marketing campaign in just a minute.

But clearly, it was a very unique way to start the year. We're very pleased with that. And U.S. wholesale was up this quarter, again, very strong performance with our customers and make note not only in Levi's Red Tab, but in our signature brand, our value brand, that was up 16% in the quarter. So one of the things that we've really moved to with the whole opportunity to amplify the power of the Levi's brand is to segment. So you've got your core Red Tab which is a core of our business, You have Signature, which is accelerating. They're bringing a lot of newness and relevance to that consumer, to that value-conscious consumer.

And then, of course, on the high end, early stages with Blue Tab, but we're seeing nice consumer reception. And that new business was up 40% in the quarter. So we're obviously staying close to the dynamics in the macro environment. But in terms of our consumer, we're seeing a lot of resilience there. And then to your point on the Super Bowl, I mean, we couldn't be more pleased with how our launch of our new brand campaign resulted.

So we had a very unique opportunity with Levi's Stadium, hosting the Super Bowl. So we were on the world stage center of culture. We leaned in. We launched our new campaign with the first time in 20 years. it got watched in the peak of -- the watch of the Super Bowl, 1.4 billion impressions we have measured that. We've got a great return on it. And really, this is about the launch for the year. So it's a formula that works for us tapping into global and local influencers, and we will continue to activate against work and music.

So to your point on World Cup, we do have plans for that throughout the year as well as collaborations. And all of that is baked into our plan, which takes us to a 7% for the year in terms of spend. So call it the peak of our spend was actually in the first quarter. That normalizes as we go through the balance of the year. We're seeing the results. We're getting a nice tailwind from all the brand activations.

Our next question comes from the line of Brooke Roach of Goldman Sachs.

Harmit, best of luck in your next chapter. It's been great working with you. I was hoping that you could unpack how you're thinking about pricing and the pricing power of the brand as you look forward into the rest of the year, did you see any elasticity in response to some of the recent price increases? And does this give you confidence to take even more pricing in what looks to be an even more inflationary environment. Potentially offsetting that, what are your plans that are embedded in the guide for markdowns in the back half of the year? And how should we be thinking about opportunity for continued markdown reduction as you implement your initiatives?

Brooke, I can -- I'll take that question. Around pricing, and I'm glad you asked it because. When we think about pricing holistically, it is about the premiumization strategy that we have on the brand. Mitigating tariffs has just been one component of it, but it is about our focus on full price selling, unlock promotions, and pricing for innovation and newness. And I was just talking about even at the kind of pinnacle expression of the brand with Blue Tab, we're pricing in the $200, $300 range. So very consistent with what we shared in the past.

We've been very thoughtful and targeted. We are monitoring consumer response. And to date, we have not seen an impact on demand, and you saw that in our Q1 results. And as matter of fact, growth for us in the quarter was driven equally between AUR and units which really does speak to the power of the brand right now. But we'll continue to be very thoughtful. We're clearly operating in an uncertain and volatile time. But given the strength of the brand, we feel really good, and our consumer is responding, especially as we take those opportunities to price -- premium price or innovation in newness.

I guess the second part of your question would be around markdowns. So the only thing I would say to that is as we rewire the company to truly operate the best-in-class retailer, we have [ new allocation ] systems. We have new supply chain leadership. And our execution level is improving, which you see that again in our AURs [ more full-price ] selling. So the capability of the team is really elevated around that front.

Our next question comes from the line of Bob Drbul of BTIG.

I guess, Harmit, I have a question for you. First of all, congratulations again, and I echo a lot of the earlier comments and sentiment. I guess on the -- you talked about ocean freight and cotton being locked through '26. Can you talk about just have there been sort of discussions around trying to -- for your vendor trying to pass through any increases away from your current [ locked ] rates? And I guess the other question is just on that is, how far are you locked with ocean freight in cotton...

So thanks, Bob. And you were great on CNBC earlier. But what I'd say is, and thanks for your sentiment. What I'd say is that we are locked through the end of the year on base ocean and air freight rate. There are surcharges that are imposed. Our view on the surcharges is that our guidance reflects this. Oliver talked about why you're being modest in your guidance, we are taking into account a bunch of things relative to that.

To your question about vendors asking for higher prices. When we reduce the product cost in 2026, it was a combination of a couple of things. First was rationalizing the SKUs, moving out of unproductive SKUs. It was about driving higher globally directive assortments, which is having more of a common line, which drives more leverage through volumes. And cotton obviously lower than a year ago really helped. And so we're very thoughtful because we've got vendors who have been with us for years, and we introduced some new competition.

So right now, we are not seeing it. If you think of the futures of cotton, as you look at they're largely consistent with what we believe. And our view is that product costs over time because we are not rationalized all our SKUs. We haven't rationalized all our fabrics yet. We're driving to more of a tighter go-to-market calendar. It was 16 months, it's close to [ 13 ], and we're trying to drive that I think all those are different levers that we have over time can continue to drive product cost in the right direction, which, is lower, not higher.

Our next question comes from the line of Rick Patel of Raymond James.

This is [indiscernible] for Rick Patel. Harmit, thanks for everything and best of luck. So looking at the 4.5% to 5.5% organic revenue growth guidance for fiscal year '26, how should we think about the split between unit growth and AUR growth, especially given the pricing actions taken year-to-date?

Yes. Thanks for expressing the sentiment, same here. You guys have been great. The way we are thinking about it is an even balance between units and AUR. The reason -- the question is why are we selling more? It's largely because we are expanding our addressable market. Addressable market, which is $100 billion for denim. And you've heard me say before, we're trying to bust the myth that we're not only about denim.

Now that addressable market is up 15x because we're getting into things like non-denim bottoms, skirts and dresses for her, expanding our tops offer. So that's why we feel selling more, and we are adding a lot of new stores to selling more along with higher AUR is probably what's going to happen through the year. Where does that balance go over time, I think it's something that we will reinforce as we guide annually. But that's how we're thinking about it. And that's what I would suggest as you model both that.

Our next question comes from the line of Paul Lejuez of Citi.

It's been a pleasure working with you. If we go back to the first quarter, I'm just curious how things look on a monthly basis, how much of the quarter was driven by December results versus the months that followed. Maybe if you can tie that into what you said about quarter-to-date, I think you said you haven't seen any signs of a change. Curious if you could talk about that by region, if there are any places that you might have seen an acceleration or deceleration relative to either the first quarter as a whole or the exit rate?

Yes. Thanks, Paul. As you know, we don't get into the level of details. I'd say on the quarter-to-date trends, they remain positive and support the guidance that we laid out for you. In terms of trends in quarter 1, I think we ended the quarter at 9%. January, February, largely in line with that. So it was not like it was way off of either higher or lower. Do remember that the trends acceleration in the quarter, as you think about timing, we had the Chinese New Year timing and then the [ Dorsen ] timing in Europe. That does impact it.

So January, February, probably a little higher than December because of that. Chinese New Year is largely towards the end of the quarter, [ Dorsen ] was largely a January, February piece. But our guidance for quarter 2 really reflects how we started the quarter.

Got it. And then any change to your macro view by region?

Asia has started really strong. Paul. Asia really started strong, which is great. China, we didn't talk about China. I think I mentioned it was positive for the first time in a long time. We've got a new team there. They're resetting the business. So our view is -- and Asia, we are underpenetrated, right?

It represents about 20% of the business when half the world's population is there. And you've seen the operating margin in Asia, we take the last 3, 4 years, improve as we drive more volume leverage. Outside that, Europe and U.S. largely consistent. And so nothing apparent right now. I think the consumer continues to be resilient. Importantly, they are continuing to gravitate to newness.

And our product pipeline is really strong, and Michelle referenced in her prepared remarks. And so I think if there's a way we can bring -- continue to bring newness in which we believe we can and drive that at good value price points, I think we could continue the momentum and that's what's reflected in our full year guidance.

Our next question comes from the line of Adrianne of Barclays.

Let me add my congratulations on the quarter and also your future, Harmit. And my question is it remains on international and the strength that you're seeing there. I guess, where are you seeing kind of the most surprised in terms of growth acceleration? And how does your go-to-market strategy differ by region, say, like wholesale versus DTC?

Yes. So I'll just give you a quick perspective across the 3 regions. If you take the Americas and U.S. in particular, it was primarily wholesale. But now this balance is shifting to more of a balanced business between DTC and wholesale. And it's not coming at the cost of wholesale DTC is growing at a much stronger phase, and we're now opening. We have about [ 70, 80 full ] price stores in the U.S. We're probably going to be opening 10, 12 stores a year for the next couple of years and doubling that. Asia is 60% direct-to-consumer and 40% wholesale, and that is primarily how we think the business grows. Most of our new stores are actually opening in Asia. And Europe is little higher on DTC than wholesale, but the product is largely a Tier 1, Tier 2 product. So very harmonious between the 2 channels. .

And I haven't spoken about Latin America, which is another big opportunity for us to grow. I mean they've been growing double-digit for a while and the team there is doing a great job. So as we think about different regions, that's the mix. I mean our view is Asia, you grow that in the high single digits. That was reflected in our guidance. Europe in the mid-single digit, that's reflected in the guidance. And Americas, low to mid-single digit, that's reflected in the guidance.

thank you. At this time, I'd like to turn the floor back over to the company for any closing remarks. .

Say thanks, everyone, for joining the call, and we look forward to speaking with you again at the end of Q2 in July. Thank you.

Thank you.

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

Great. Well, welcome, everyone. Good afternoon. I'm Jay Sole, UBS' retailing department stores and specialty softlines analyst. And welcome -- I'm sure you've been welcomed already, but I'll just welcome you again to the UBS 2026 Global Consumer Retail Conference. We are honored to have Levi's here with us today. Representing the company is Harmit Singh, Chief Financial and Growth Officer. Also Aida Orphan is here. She's Vice President of Investor Relations.

And I think Harmit and I just going to have a little conversation, and we'll have a lot of questions to get to. So we'll just get started.

And I guess the first one is we're going to talk about 2 different ways. First, you have 2 different hats. You have your Chief Growth Officer hat, but also your Chief Financial Officer, hat. And I think that the first thing I want to talk about is just in your role as Growth Officer, what do you expect will be the most important drivers of momentum as you look ahead to [ 2026 ]?

Sure. Well, good afternoon, everybody. Thanks for joining our [ Ying Yang ] session. But let me just start because we're in the process of closing quarter 1. So we're in a bit of a quiet period right now. So my remarks are not going to talk about updating trends or guidance, et cetera. I'll reflect what we really talked about when we reported earnings a couple of months ago and the guidance for the year.

To your question, yes, in a 1 ways, 2 hats. I hope that's a trend for CFOs going forward because I think CFO should embrace growth and a lot of CFOs do. But just a bit of history, we had a great '25. We have guided a strong '26. If you go back the last few years, our strategies of being brand-led, DTC first and powering the portfolio, clearly working. And just a bit of stat, our growth has accelerated. We closed last year at 7%. The organic growth, the year before is 4%, the year before that is flat. We've clearly grown market share. I'm happy to talk about it, and positioning ourselves solidly at a mid-single-digit growth company. The second is, while we're growing the top line, we're also accelerating the operating margins. Operating margins, '23, over 9%, '24, a little over 10% and '25, a little over 11%, and we're guiding '26 as closer to 12%. So as you think about this pivot from a company that had its foundation in denim to a company that has its future in denim lifestyle. We have been able to expand our addressable market, which I can talk about. Addressable market in the past was probably the denim category, $100 billion. The addressable market going forward is 15x that. I'm happy to share that in a minute. But more importantly, our future is about taking the $6 billion company, making it $10 billion and taking a company that generates operating margins of, I think, '26 we're saying high 11%, close to 12%, and getting to 15%. We have building blocks that clearly articulate this.

To your question about what drives growth in the growth offices role, I think a couple of things. We spent the last 2 years really narrowing the focus, exited Denizen, just closed the deal on Dockers, exited a low of footwear business. So really focused on, okay, here's how we grow Levi's and we're accelerating growth in Beyond Yoga, really 2 pieces. The other thing is a lot of companies have different ways to grow. '25 is the best example of what I call the power of the high end, which is we grew every facet of the business. We grew DTC, we grew wholesale. We grew U.S., we grew international. We grew men's, we grew women's. We grew bottoms, we grew tops. And what I really like to see is growth not only coming from higher AUR, but also coming from selling more units because that's the way you get market share, and that's what also really happened. And so I was just at the leadership, we bring our top 250 leaders together once every couple of years. And I really talked about the power of the high end, which means that you've got to grow both sides of the business because the result is really magical. We are able to grow our TAM, which I can talk to you in a minute. 1/3 of our 7% growth last year was driven by expanded TAM. Happy to get into. So that's the second piece of it. So first, narrowing the focus, really focused on a higher addressable market and growing every facet of the business. And if you do this, the 5% mid-single-digit growth is here to stay for a long, long time. So that's really taking a hard look at where the growth comes from and ensuring you can drive growth, but doing it with a financial lens, which is it has to be profitable. It just can't be growth for the sake of growth. That's why the areas that we are growing faster, whether it's women's, whether it's direct-to-consumer, whether it is international, are all accretive to gross margins. And that's important. And as we make this pivot to a DTC-first company, I think DTC, we closed last year at 50%. We are aspiring for the DTC business to get to closer to 55%, DTC EBIT margins are lower than wholesale EBIT margins, but we have been successful in growing DTC EBIT margin. Last year, we were up 300 basis points. And so making sure we narrow the gap really drives the operating leverage, that's really what we're focused on.

Okay. So I definitely want to circle back to margins at some point, but I want to just make sure we pick up this thread of the total addressable market and how it's increasing as you pivot more into lifestyle. I think you mentioned 1/3 of the growth last year came from TAM expansion. I guess how much larger is the opportunity longer term? And maybe if you can also touch on the launch of Blue Tab, your high-end denim collection, how is that doing? And what's the opportunity there?

Sure. So I'm going to BlueTab denim's bottom the BlueTab blazer. But...

You got cool [indiscernible] that too.

And the collaboration with Air Jordan, which we launched as we launched the Super Bowl ad. But basically, the denim category is about $100 billion. It's growing around mid-single-digit range. 10% of the denim category is what we call premium denim, what we are internally calling affordable luxury. We've not played in it. And so about a year ago, we launched the Blue Tab. Prior to this, it was largely a made in Japan product, sold in Asia, largely men's bottom. Blue Tab is now taking the -- is inspired by Japanese denim selvedge denim, but it's more. It's more a head-to-toe look, both for him and her, and it's growing very nicely. Last year, we tested it in a few doors. This year, we are scaling the test, and we really scale the business [ to ] '27. That's how we're thinking about it. But it's a big piece of the denim category that we don't play in. So that's one, I would say, organic expansion of TAM.

The other thing that we are doing is most of you are dressing a lot more casually as you go to work, but you're not dressing in jeans every day. So we're really making this pivot, especially after the exit of Dockers to drive more non-denim men's bottoms. We introduced performance [ stack ] with growing our chinos business in the U.S., Levi already sells more chinos and performance segment Dockers ever did, right, as an example. We're just getting started. So that's one area. The second is we've introduced denim skirts and dresses for her, which we never had. Again, denim is aesthetic, but something that we never played in. I talked about the Blue tab. The other piece is, if you think of waste up, we've really focused on growing our tops business. Our tops business in quarter 4 was about half our growth, grew about 7% a year ago. It's still only 20% of our business. And we make this pivot to denim lifestyle, there's clearly an opportunity. So we leaned in on sweaters sold out. We leaned in -- I mean we didn't have quarter zip and a lot of men here wearing -- love quarter zip. I love my quarter we don't have it. We didn't have it. We will probably have it at some stage soon. As you think about shirts, you think about polos, you think about woven shirts for her, et cetera. And those are the areas we're looking at. Made a big play in outerwear in quarter 4, did really well. I guess the only thing I would say is this new TAM, which is probably $1.5 trillion, doesn't mean we're going to just do apparel for the sake of apparel. It has to be driven by a denim aesthetic. We're not going to be fashion forward. We're still going to be slow fashion because managing inventory and all that is an important piece of the pie. So that's how we're thinking about the market. And that apparel segment is growing also in the mid [indiscernible] sometimes a little higher, the performance piece is going high. So I think we've got growth and a sustainable level of growth for the next [indiscernible] especially as we make this pivot to a denim lifestyle and [indiscernible] driven business. Now what happens is we're not taking our eye off the ball on wholesale. Wholesale has to grow. But when wholesale customers see what's happening in our direct-to-consumer business, they start leaning in. Macy's, for example, in Herald Square leaned in and they've given a larger footprint for men's, a larger footprint for women's, more denim lifestyle. We had a few of our key customers come doing Super Bowl, that's all we talked about it. How do you -- how do they lean in more in women's. Women's is leading the denim category growth in the U.S. How can they lean into that? How can they lean in. So there's a lot more opportunity...

That makes sense. And I guess I want to follow up on that, ask few question. I don't think I've actually asked you this before, but what strikes me when I walk into the store is that -- and you just mentioned it, it's denim-led. If you're going to do denim shirts and things that you haven't done before, it will be denim. There are a lot of denim tops in the store. And I think that the part I haven't asked you is that it feels like a very patient way to grow a brand and gain credibility in other categories, which has to ultimately drive an even bigger lifestyle assortment, which can capture an even bigger part of the TAM. Because I think as investors, we don't want to see companies rush into other categories where maybe the consumer hasn't quite given you permission to play because that can feel inauthentic and that can turn the consumer off. But the question is, how intentional has that been? How intentional has it been to say, all right, we know we can be a lifestyle brand. We know we can be more than a U.S. wholesale men's blue jeans business. We know we can be a global omnichannel men's and women's lifestyle brand across many categories. But it takes time to get there and to bring the consumer along with [indiscernible] authentic and exciting. So just tell us about how your company has managed the brand from a standpoint. So 10 years from now, when you walk into the store, you're seeing a whole lot of different options for Levi's, the consumer says, of course, that makes total sense versus just kind of rushing into stuff maybe for the brand.

Yes. And I think that discipline when Michelle came on board a couple of years ago and Chip was around, he said, Michelle and heard me because I was looking at the corporate strategy, why don't you guys get together? And let's see how we refine the strategy. We sat as a group, got the executive team, and that was really a big aha was, okay, we are about denim. We were moving into lifestyle, but it was not about denim lifestyle. We were doing lifestyle for the sake of lifestyle. And we said, okay, no, it has to be about denim lifestyle. And if that's the case, what's the role of footwear? Probably not. We're not great at footwear. We've got other footwear brands. We can collaborate with brands like New Balance and Nike, but that's not what we want to wake up every morning. Dockers was a piece of that and said, okay, maybe not. And so it was a more disciplined approach. And the idea really was whatever we do, we want to be great at because Levi's is known for quality. It's okay to be slow. but it's great to have a strategy going forward. So I mean when I talk about Blue Tab, we just didn't get there and say, okay, we're going to want to own this and take it from whatever it is to $100 million business. We are going to step our way into it because what is also more important is we've got to convert the -- our associates who are used to selling denim bottoms. They've got to come in along -- in this journey. I have a big -- when I talk about commitment, I talk about 3 levels of commitment. The first is a political commitment. When leader says we have got to do this, people normally nod their head. Very little actually happens, right? The second is the intellectual commitment where you engage people's mind, a little more happens. But what really makes a difference is when you engage their head and mind and explain what is in it for them. And that's why when we call our 250 leaders together a couple of weeks in San Francisco, and I was on stage and Michelle was on stage and our product person was on stage, we were talking about this journey into men's lifestyle. Why is it important? How do you engage people? How do you grow market share? We talked about the new TAM, the $1.3 trillion -- that's $1 trillion is one of the things I revealed in there because we want people to feel that we can be a bigger business, and we can do it the right way while protecting the DNA of Levi's and Levi Strauss. So that's why it takes a little time. And we've got a large wholesale business. We've got a bunch of other brands. If they have to start giving us more floor space, it's going to come from somewhere. And so that takes a little time.

Makes sense. Let me follow up with one other, because you mentioned Blue Tab a couple of times. getting into Blue Tab, which is a way to get into that aspirational luxury, I think, as you called it. And it elevates the brand to be able to sell things at a higher price point. But at the same time, you talked about Denizen, you talked about some of the businesses that you [indiscernible]. And we know there's been changes in distribution, maybe getting away from some of the promotions and discounts and maybe channels where you don't feel like the future is as bright as other channels. I don't -- the company doesn't use the term quality of sale very much, and it doesn't really talk about brand elevation necessarily because other companies will use that term. But to me, clearly, Levi's has been on that journey to say, hey, we are the best brand in the world when it comes to represents that when we go different channels and different [indiscernible]. Talk about how much work is done because it feels like a lot of work has happened over the last 5 years and even now getting to the point where you can do premium denim because a lot of the work that you set yourself up to get to this point because you cut off sort of the bottom end of the distribution where maybe it was holding the brand down. Can you just talk about all the work that's gone into that? And is there still more work to do to be that -- to be what Levi's is the best version of Levi that it's been.

When we guided this year, we talked about pruning some club business, talked about pruning some grocery outlet business. When the brand was not -- didn't have its moment was not as strong, we were into -- we were selling through retailers that we feel we probably should not. And so we are trying to elevate the brand. You take Target as an example. Target was selling Denizen. That was all they were selling $30. Then we partnered with them and said, let's introduce Red Tab. We tested it. We tested it with 70 stores for men, 20 stores for women, then we expanded it to 200 stores. We went to 700 stores. When we touched 700, we had a discussion and said, maybe we don't need Denizen. It's $150 million business. We took 1.5 years and exited that. Now as you know, a week or 2 ago, we've decided to expand that to 1,000 stores because it's really elevating the Levi's brand in Target. And so it's just a bit of a journey as an example. So to your point about pruning businesses, I think we have a large off-price business. It's largely -- we don't make for off-price. We've never done that. It's largely flush. And as the inventories are healthier as the consumer is in a good spot, our products are working. We're slowly pruning that business off also because it's really allows us to elevate the brand. Soon after COVID, we probably pruned, I think, 2,500, 3,000 different doors in Europe, smaller doors, not as quality conscious as we like it, et cetera. So where we can, we did a little bit in India, I think, last year. So I think it's a constant evolution. It takes a period of time. We're not going to yank ourselves out of large customers. That's not -- some brands have done it. That's not who we are because we want to drive market share. And we have some real loyal consumers who love us. And so it just takes a little bit of time and discipline [indiscernible].

Okay. Maybe you mentioned on your last earnings call, I think 40 -- excuse me, 50 to 60 net new store openings this year. As you expand stores globally, which markets and countries are you targeting? And maybe if you can talk about the improvement in profitability, which you mentioned before in the DTC channel, what's been driving that? That would be next question.

So our model is about 50 to 60 net new system doors every year. As part of my Growth Officer role, I also look at -- look after all real estate, real estate expansion, franchise expansion, et cetera. And having spent my formative years in a franchise business, ensuring that the franchisees are able to grow is really near and dear to me because if you take out 3,300 doors that have a Levi's logo in front of them, we have about 2,000 -- 1,500 to 2,000 franchises [ or less ] we operate. And so it's important to get the entire system to grow. The 50 to 60 doors on a net basis, I would say 10 to 12 in the U.S. In the U.S., the business was largely an outlet business 10 years ago. Now we have about 80 full-price doors. So in New York, you have -- beside our Times Square door, you have a door in SoHo Street, Hudson Yard, 34th Street, et cetera. We opened about 4 last year. We scaled up about 8, 10 every year. But when we took a bit of a pause because we wanted the stores to be really profitable. We wanted -- and the other thing we did was we took our doors and said, if we really want to accelerate the women's business, we should lead with women, right? So when you walk into a door, the women assortment is right there. 70% of our doors in the U.S. now lead with women, right? And women's is 50% of the DTC business in the U.S. And we're just getting started around the world, as an example. Because these stores are now very profitable, we are scaling it up to 10, 12 a year. I think we can double that. And what it does is, it changes the business in the U.S. from primarily a wholesale business to a business that has DTC and wholesale at an equal fitting. I think we ended last year with -- in the U.S., DTC was about 45% of the business. So I think that's the transformation. Outside the U.S. are the other doors, largely in Asia. Europe is about 5, 10 doors a year. The rest are largely Asia. So that's -- and I personally believe we can be opening 50, 60 for the next 4, 5, 6 years, so really growing the system. The reason -- the way -- I think when I call -- look at the DTC business, I call it a bit of a trifecta. You grow same-store sales. We've had 15 consecutive quarters of growth on that. You open new doors, 50, 60 a year, and you grow e-commerce in the mid-teens. So that's a good trifecta. And we've been doing that successfully.

To your point about DTC profitability, I think we ended last year in the high teens, and this is like fully loaded. We are loading the cost of running stores, including a bulk store in it and e-commerce, fully loaded technology for e-commerce and advertising. The wholesale margins are probably in the low 30s. And so -- and last year, DTC margins were up by 300 basis points, largely driven by 3 factors. One is higher revenue per square foot. As we -- I talked about the women's business, for example, really driving and accelerating. We're really focused on converting more. Traffic is probably flattish kind of thing, but we are growing only because we're converting more. This year, we're making a big pivot on driving more units per transaction. If it's all about lifestyle, you walk into the store, you may walk in for a denim bottom but you walk out with a top -- a denim-inspired top and a bottom. So we're really making this pivot to drive more UPT. So that's one piece of it. The second is gross margin on direct-to-consumer business are pretty good. We're also narrowing promotions. I mean one of the things we realize is if our products are resonating, there's no reason we shouldn't be selling more at full price. So we're taking a hard look at our promotions. We're reducing the cadence. We're reducing the window of promotions and we're driving more full price selling. I think that's an opportunity that will be here for a while.

And the third is just getting better at managing costs, labor productivity tools, et cetera. We didn't grow up as retailers, DTC retailers. We grew up as wholesalers. So we've got talent. Our commercial officer spent 30 years in retail. He joined about 2 years ago. He's brought a few people who've done this for a long, long time. And so we're really investing in tools that make this and improve the margins and productivity over time.

Makes sense. I think just from my perspective, talking to a lot of investors, a few years ago, the question was, over the next -- we just talk about the next-gen stores and rolling them out, and it's a new format, it's going to work. I mean that was something that was an open question, how successful can Levi's really be with their own store format. And that's -- I mean, just to talking about the margins and success and all the productivity that you've had, I mean it's not even -- I think that people have sort of not really realized that Levi's has unlocked this opportunity. And to your point, you can see 50 to 60 doors per year for quite a few years going forward. I don't know if that unlock is truly appreciated because now you're just like, okay, we figured this out. We know how to do this, and we're doing it. It's been very successful. Now we're rolling it out. It's a much different story than a couple of years ago when people are like, it's really going to work. Levi's is kind of [ a whole company ]. And now you're here. So to me and from what I've understood is that before when you have -- in your mind, you always assess the probability of how successful something [indiscernible] be based on the evidence that you have. I mean the probability of this DTC operation being way bigger and taking advantage of this huge TAM that you're talking about is so much higher. Just given what you've proven over the last few years, I don't know if -- sometimes I feel like that's lost on people.

Yes. No, I think you're right. I think there are a couple of myths, if I could bust, I'd like to bust. One is we're more than just wholesale. We've had wholesale now grow for a while, but we're more than just wholesale and more than just U.S. wholesale. That's one. And second is DTC is here to stay successful. So for example, when we were ramping up new doors, one of the things we did earlier on, and this was in discussion with the Board was 2 things. One, ROIC became a metric in the long-term compensation of leaders in the company, okay? We had to make people -- educate people what ROIC really stood for, but every store has an ROIC. We have a threshold. The other thing, and I learned this during my retail days at Yum! is, you have to measure the returns on stores. And so we've got a concept called hit rate, which is, again, something I did at Yum! years ago, which is what -- how many stores actually hit the revenue and profit threshold. And we review that with our finance committee of the Board every year and with the executive team. And our hit rates have never been better. okay? I'm not going to get into what it is, but it's pretty damn good. And so -- and it's all about learning. It's a autopsy without blame and saying, okay, here are the stores that didn't work, here's why it didn't work. Let's learn and get on with it. So I think it's a journey. It takes a little time, but we're pretty pleased with the progress that has been made. So over time, people will -- I think the question we get a lot of time is give us your same-store sales number, right? Give us your comp sales. And we have this debate internally. And -- but we have talked about the fact it's positive. At some stage, maybe we have the courage to give a number. The thing about a number is once you give a number, then you have to give it every time. But the fact I would say is direct-to-consumer business has been growing high single digit, low double digit for years. And so -- and it's 50% of the business, and we think it can continue to grow.

Okay. I want to ask a couple of things. I know you mentioned you're getting a lot of questions. I know a lot of questions about price increases last year. First of all, just remind us what kind of price increases you did take in the U.S. to offset tariffs? And then when do those prices -- those price increases kick in? And then how much tariff impact is embedded in the guide for the fiscal FY '26, the current fiscal year that we're in for the gross margin [ guidance ]?

So it's -- as you know, it's changing on a regular basis. Our guide assumed an incremental 20% of tariffs for '26. Pre-liberation deal in '25, we were probably paying about 13% tariffs. An incremental 20% takes it closer to 32%, 33%. That's what our guide has assumed. The latest that we are hearing that 20% is probably closer to 15%. We will -- when we report earnings in April, we will quantify that. Whether we can change guidance for that, I don't know. It depends what happens because it could change, but we'll quantify the impact of it. The way we handle pricing in the U.S. is we didn't price for -- and that's about the 20 -- incremental 20% is about 150 basis points headwind to gross margin. We did guide that gross margins will be flat in '26. So we've got a couple of things that are offsetting it. One is pricing. So we didn't price 100% for the tariffs. 1/3 of the tariffs is what has been priced largely in the U.S. And that's a combination of pricing on products that are new and rolling out, which is innovation as well as the core products. We didn't lead. We were not the leaders in pricing. We were thoughtful, we waited. The department stores have taken up pricing on private label. We want to make sure that the difference remains between our pricing and that. And we lean in more to the products that are new. So that was one piece of it. It went into effect largely in quarter 1, between January and February. So far, no pushback from the customer in terms of what they're buying for the year. And the consumer generally is resilient. So we're seeing that as we speak. The other 1/3, we actually try to offset by product cost negotiation. A large piece of our growth last year was volume. 50% of our growth this year should be volume because we're selling more, we're growing market share. So we leverage the volume with our vendors. We have also eliminated a lot of unproductive SKUs that has led to improved margins. We also opened the door with a few new vendors that drove a little bit more competition. And cotton as a commodity was a little lower than a year ago. So a combination of that has led to lower product costs. The other thing about our model, as you grow women's, you grow DTC, you grow international, gross margin probably improves 30 to 40 basis points a year. So you take the combination of these factors as well as higher full price selling, that's how we were able to offset gross margin. Gross margin, largely flat. Gross margins hit a record last year. We closed, I think, very close to 62%. It was 58%, not very long, right? So it has grown nicely. And given that the brand has momentum, given the brand is so strong, products are resonating, we think accretion of gross margins is here to stay. So that's how we are kind of addressing the impact of tariffs as the year progresses.

All right. I want to keep moving. I want to ask you about SG&A. Specifically, I want to ask you about the changes to your distribution centers in the U.S. I guess, when do you expect to see the full benefit of your distribution center transformation on SG&A leverage? And what have been the issues you have faced relative to that?

Yes. So as we are getting ready to become a $10 billion company from a $6 billion company, a few infrastructure investments we made. One was like a lot of retailers, we're upgrading our ERP. North America is done, went flawlessly. That was part of my remit as CFO. We've done probably half of Asia, rest of Asia. We're doing Beyond Yoga as we speak. And so far, it's going really well. And we'll finish Asia sometime in the next 12 months and then do Europe. And so we're largely done. What it really does is it gives us a foundation for real data unlock. We can accelerate e-commerce. We can accelerate our AI initiatives, et cetera, because now you have one common platform. I can sit in my office and I can see how each store in North America or anywhere else is performing on a minute-by-minute basis, how DCs are doing, which I could never do. So the other piece is really our distribution network, which was all built for wholesale, not built for omnichannel. Now the -- our European network is now built for omnichannel. Take the U.K. DCs that we operated, that we brought in e-commerce. That was really servicing wholesale and stores till about May of last year. We brought in e-commerce with a third party. And our U.K. business has been on a complete fire. I mean the retail in Europe is largely flat to down. We are growing double digit because we are servicing faster. We have one common inventory and the shipping costs on e-commerce have halved. So that's just an example. We're in the process of doing that with our non-U.K. business as we speak. That probably gets live in the -- by the end of the first half. And our European results in the second half of last year have been generally good. So I think Europe, generally feeling good about it. In the U.S., we had 4 DCs that we were operating, 2 were 30 years old, built for wholesale, largely manual. And so we said rather than remodel these DCs, which means you have to shut it and spend hundreds of millions of dollars, we said, let's go with a third party. And so we have signed up with Maersk. And Maersk is in the process of ramping up. That's gone a little slower than we expected, largely because technology has taken a little longer to stabilize and ramp up. As that was happening, we were seeing demand for our products go through the roof. What I did because Michelle asked me to look after this for a while last year is instead of shutting both the DCs that we were going to shut, I kept one open. I shut one because we couldn't service the demand. And that's where we've had some distribution costs that are higher than we expected, but it was able -- we are able to drive higher volume on it. The thinking is, as we said in our guidance of Q4 earnings, the thinking is that stabilizes by the end of the first half, we can shut the DC that's running parallelly. And then we start bringing e-commerce in. And so I think by the end of the year, we start seeing benefits. I mean, right now, our distribution costs are a little over 7% I think there's at least a point there, maybe more as we try and leverage demand, make sure there's inventory efficiency, et cetera. The other thing that has happened is we now have a chief supply chain leader who has distribution experience. We have also added a couple of distribution experts because what we're realizing is while we manage a hybrid system, some we operate, some operated by operators like GXO in Europe and Maersk, we really need that experience in-house to really work with our third-party providers. And it's a huge unlock. In my view, it's probably unlock for top line as well as bottom line. But that will take time and happens over time.

Yes. I mean it sounds really powerful, frankly. I mean, just to be on one global platform and have the data and have the visibility that you're talking about in your office to see every store in every DC. You mentioned AI as part of that. Can you just talk about how the company is leveraging AI to drive the business?

Yes. I mean we're leading and Michelle has personally taken this as a challenge, which is great. We are a retail apparel player, but we work in San Francisco, where that's -- the city is completely changing because of the AI focus. So where we're leaning in is on 2 areas. One is how do we drive or engage with our consumers better. And that is both online and in the store, right? So we've got use cases where we're saying, if you have a chatbot, that person that helps you shop and drive users shopping experience, how does that unlock and improve the shopping experience. For our stores, our associates require help and training on the new stuff. So we're using something called STITCH that really helps them become better sales associates. Internally, the thing we've done this year is we said no more incremental headcount. And we're going to drive more automation using AI. I've established what we call talent hubs, global talent hubs in Bangalore, in Warsaw and in Mexico, and that's beyond finance and technology. Target is a great example. They have 5,000 people in Bangalore, and it's across all functions. And so the question for us is, how do you drive that across all functions, take some processes and streamline the processes while automating it. So that's what we are looking at doing. And you get great talent. I mean that's what we're calling a talent hub. And I said we can't call it a global capability center. It's actually a talent hub. We get talent across both genders. We get talent that really knows how to use AI and other tools. And so that's the other piece that we're doing. Forecasting our revenue for the people here who are in the finance camp, we've got an algorithm that we've kind of rolled out a couple of years ago. Harvard has written a business case study start in the second MBA program, and it's about using that algorithm to really help improve our revenue forecasting. And it's probably predicts 1 or 2 points better than my wonderful associate around the world. It doesn't replace the human modeling. It just helps improvise. For example, every time I have a forecast and I discuss it with the team, I have what the algorithm tells me. When I do earnings, I have what the algorithm tells me. And we use that as a way to kind of decide what we guide, et cetera. The Board is very -- sees it on a regular basis. Now we're expanding the algorithm to help forecast profit and cost because that's the next journey. While we've got a good -- a lot of great growth, I really want to improve the flow-through and the operating margin for the company. And I think things like this will just help us get better.

Got it. All right. Well, that's -- I know that flow-through and margin expansion is very important to you. So I want to get to this question because I know it's very topical, but can you just talk about your Middle East business? Obviously [indiscernible].

Yes. No, the -- it's unfortunate what's going on. But our Middle East business is a small business. It's less than 1% of the total business. The product we get through the Strait of Hormuz is probably -- just services the Middle East. So it's very, very minor. It's largely a distribution business. So it's in the hands of distributors. And so there's -- the operating leverage or deleverage when the business is down is not pretty high. And so that's our -- and we'll talk more about it when we talk earnings in a couple of weeks. But the teams are game planning this as we speak. I mean, as you think about the impact of oil in businesses like ours, I mean, we went back, Aida and I went back and looked at what happened in 2008, what happened in 2011, what happened with the Russia-Ukraine war. The thing that we saw was sales didn't suffer at all. There was not a dramatic impact. The other piece is what happens to product costs. Cotton has remained where it is, probably a little better. So that's again -- and we have locked product costs in for the year. So that's not an impact. So -- and then there's the currencies, right? And so far, that's been okay. So as you think about this, depending on how long this goes, we have game planning, like we had a tariff task force as part of my transformation office, we've got a task force now game planning this as we speak. But if the consumer remains solid as no signs yet, I think we'll be okay.

Okay. All right. So maybe in the last 2 minutes, I want to ask one capital allocation question. And it's how are you thinking incrementally about near-term capital allocation priorities as well as dividends and buybacks as you [indiscernible].

Sure. So we spent about 3.5%, 4% of our revenue on CapEx. 2/3 of that is to grow the company. So think about opening doors, remodeling doors. We probably -- between opening and remodeling, we're probably doing a door a day for the year, which is great. We also spend on technology, think about e-commerce, think about some of the AI investments. That's about 2/3 and about 1/3 for infrastructure, which is ERP upgrade, some maintenance work. So that's one piece of it. We are a dividend-paying company. Dividends grow in line with net income. Every year, for the last few years, we've taken up dividend 8-odd percent. We normally do that in the second half of the year. And then we buy back stock to offset dilution. If there's more cash because our balance sheet is so strong, there's a lot of cash, we return more back to the shareholders. So we exited Dockers, probably generated a couple of hundred million in cash. That's all been returned back in the form of an ASR program in Q4 and an ASR program in Q1. And so that's the way we think about it. If there's more cash, have a discussion with the Board, and there's nothing to do because we are now focused on 2 narrow businesses of Levi's and Beyond Yoga, that's something that we can always accelerate.

I think that's a great place to stop, Harmit. Thank you so much. Always enjoy speaking with you and congratulations on the success and [indiscernible].

Thank you, Jay. I appreciate everybody taking the time. Thanks a lot.

Thank you, everybody.

All right. Welcome to the Global Consumer and Retail Conference. Please welcome Levi Strauss and Paul, over to you.

Thank you. It's Paul Lejuez, Citigroup. Thanks, everybody, for joining. And with me, CFO of Levi, Harmit Singh. I really appreciate you being here. I know that you might want to start with just some quick opening remarks, just to make sure we get that out of the way, and then I'll dive into some questions.

Paul, thanks for having us. Yes, my opening remarks were largely -- given the fact that we are in a quiet period, we're closing our first quarter of '26. I'm not going to get into current trends, latest financial outlook. In my remarks, I'm essentially going to reflect what we talked about in Q4 '25 in the results late in January, we will be reporting results early April.

But overall, we had a very strong year in '25. We're entering '26 with momentum. Our guidance reflects it. The company is transforming into more of a denim lifestyle company. And I'd say our past was denim bottoms. Our future is more denim lifestyle. I'm happy to talk about the new, what I call a very different addressable market going forward. Overall strategies are working.

Our strategy is all about first, being brand-led, Super Bowl was a good example of brand demonstrated the strength and momentum being DTC first. Our DTC margins are growing, our DTC business is growing and last but not the least, what we call powering the portfolio, which is all about growing international as well as really focused on 2 main brands, Levi's and Beyond Yoga. And with that, I'd love to open it up for questions.

Great. Great way to kick it off. I think we'll definitely touch on each of those topics. Maybe we'll start with some of the strategic changes that have happened. You've had a lot of strategic initiatives over the years. You referenced momentum in the business. Which of these strategic initiatives do you think has really been kind of like the key drivers of the momentum and what's going to keep it going as we look out to 2026?

Sure. So I think if you go back, the fact that we narrowed our focus and exited low-margin low-growth businesses was a big unlock. I mean we just announced the complete exit of Dockers. We have exited Denizen. We exited a smaller footwear business and really focused on accelerating Levi's and making this transformation of denim lifestyle in Levi's. So I think that's number one.

Number 2 has been the dramatic improvement in our product pipeline. We clearly are leading trends. The denim category is accelerating both in the U.S. and outside the U.S. And this pivot to denim lifestyle has allowed us to grow our addressable market and putting on my growth officer hat which I think should be the future of every CFO in the world because I think it really enables the CFO to really focus on profitable growth.

What that has really done is a couple of things. If you take '25, the 7% growth, 1/3 of the growth was the newer addressable market. So things like getting into denim bottoms for him, skirts and dresses for her. I'm wearing the Blue Tab, which is 10% of the denim category, which we haven't played in. I think our market share in the premium denim category is 0.4%, and it's a huge category as well as what I call waist up, which is the shirt I'm wearing and our outerwear and sweaters we made a big push for.

I think those are the opportunities that drive growth. I think what really helped accelerate growth last year in '25 was what I call the power of the magic of the and. We grew DTC and we grew wholesale. We grew U.S., we grew international. We grew tops, we grew bottoms, and we grew women's and men's. And there's no reason why that cannot sustain well into the future is not new areas that we're playing in. It's just that we are really narrowing the focus and growing that. And Beyond Yoga we can talk about. Beyond Yoga was up in the mid-teens. We are in the early innings there. The category is growing high single digit, but our product is unique.

We're differentiated. We only have 14 stores in the U.S. We are not present internationally. We just launched a men's assortment and men's have really gravitated to the performance tech. So I think there's a lot more there. But the most important piece of it is it's not necessarily only growing the top line. As you said in the video recorded for our leaders, we just had a leadership summit, it is about growing the top line as well as growing the bottom line. And I think our opportunity to drive higher flow-through or convert a larger percentage of revenue into profitability, and that's really the focus of that will accelerate our operating margins.

Can we talk a little bit more about Blue Tab sort of what you've seen so far this high-end denim collection that you've introduced, how's it doing and what's the opportunity in that product longer term?

Sure. So Blue Tab was inspired by our focus on made in Japan, I mean made in Japan denim it used to do really well in Asia. It was sold in a couple of Asian countries, sold in China and it was largely men's bottoms product. Given that we were not present in the premium denim category because it's something that we've taken our eye off the ball maybe a couple of decades ago.

Our merchants and product designs got together and said, it's a category that's growing. Levi's as a market leader, has a clear opportunity to play. And so they introduced what I call more head-to-toe both for him and her. And so what I'm wearing today, the blazer and the denim bottom is the Blue Tab product.

Last year, we decided we're going to make this global tested in, I think, 14 mainland stores in the U.S. We never had mainland stores in the U.S. It's largely an outlet business to about 5 years ago and a few stores in Europe, along with Asia did really well. And so we think it's a clear opportunity for us. It's a large category growing well.

It's what we call affordable luxury, right? And the consumer has responded really well. And so this year, we're introducing broader assortment, we're going to expand it to more doors, maybe select premium wholesale customers. And then I think in '27, we'll have a full rollout.

So that's how we're thinking about it. The price points are about 2.5 -- 2 to 2.5x Red Tab. So instead of $100 and $120 product, you get more like a $220, $250 in Europe is slightly more higher given just the premium nature of our business there and it elevates the brand. And so that's how we're thinking about it right now, and it's clearly expansion of TAM. And so we just had -- as I said, we call our 250 leaders together and a big piece of what Michelle and I had talked about and the product people talked about was there's a long runway for growth for the brand, getting into areas like premium denim are important and then expansion of the addressable market in areas like tops, et cetera.

And how does that product skew male versus female?

I think it's more balanced today. It's -- I mean, we didn't have a women's product. Today, it is men's and women's is head to toe and you see it in our key stores and is working well. And it's going to get tighter. The only other piece in what we call affordable luxury segment is our collaborations. We've had successful collaborations with brands like Barbour with Sacai, along with the Super Bowl we actually launched the collaboration with Air Jordan.

So the Jordan shoes, Jordan jackets. And so I think -- those are the things that probably make well and we're selling out. In the past, our collaborations were really limited. So we didn't make a lot of money. We had the scarcity factor. Now we're trying to balance it so that we sell a lot more, especially with brands that are similar to ours in terms of momentum and awareness and stature.

That's great. And how do you think about the women's business in terms of long-term penetration? I think last year, you ended up almost 40% of the business was women's. How do you think that should be longer term?

Yes. So it's the -- if you think of the category, women's are growing faster than that, and it's underpenetrated for us. So about a decade ago when I joined a little over a decade ago, women's represented 20% of the business. It was probably less than $1 billion. Gross margins were in the 30s, product was not resonating. And so the team leaned in, we have doubled the women's business. It's 40% and the gross margin are higher than the men's.

This business, my view, when we get to $10 billion will be double what it is today. It's growing last year. I think it grew 11%. It has been growing high single, low double. The way we're making the pivot is a broader assortment for her. Number one. Number 2 is if you think of our stores in the U.S., take a full-price stores, we are now leading women's. So in the past, when you walked into the store, you're greeted with the men's product. About 1 year, 1.5 years ago, we said, "Let's shift—75% of the shoppers are women. Why don't we start with the women's product?" the question was, would it cannibalize men?

Actually, the magic of the and appeared again, it grew women's and didn't cannibalize men, which was important. And so today, 70% of our mainline stores in the U.S. lead with women's. If there are not 2 floors in the store, then you have women and men's assortment on either side as you walk into the floor. And again, at the recent summit with leaders, I was like, we have 3,000-plus stores, if you take the franchise stores and ours. And we're just getting started here.

So why don't we take this to market. We have tried this selectively in stores outside the U.S. Take our flagship store in Mexico: previously, when you walked in, you were greeted with men's product. About 6 to 8 months ago, they changed that to women's, with a very similar result. And so I think that's one way of driving or accelerating the growth.

To your question, my own view is that this can be at par with men's, so 50-50 over time. And that's not a bad product. That's not a bad result. It could be higher, but I think 50-50 the next base camp where this goes.

So we'll continue to see women's outperform.

Yes. I think so. Michelle is leading the charge with that solidifies our chief product and merchant is also a woman, she's driving that. So I think it's clearly making a difference.

Yes. And how do we think about women's growing faster than men's? How do we think about the other -- the drivers of sales for the company overall? And is it mid-single-digit organic growth rate sort of the right ballpark to think about? And how do we think about that in terms of channel, geography, what are the --

No, it's a good question. I mean, if you think of -- I mean take last year as an example, right? The denim category globally grew 3%, around that. We were up 7%. 1/3 of the growth was what I call expansion in our addressable market, so things I talked about, which means you back that out, we grew 5%. So we outpaced the category. Our view is we continue to outpace the category, especially if you're delivering the part of the end across all the pieces I talked about.

Euromonitor's projection is that the denim category goes in the mid-single digit over the next couple of years, especially as the world casualizes. If you take premium denim, it probably grows a little faster than the normal denim category. Apparel is around the same pace. So the way we think about it is and that's where we guided for '26 is a mid-single-digit growth company.

Now where is that growth going to come from geographically? I'd say the Americas, which includes the U.S. probably in the low single-digit range, Europe in the mid-single digit. Asia represents 20% of our business with half the world's population, probably grows faster, say, mid- to high single digits. So that's the geographic piece of it.

I think if you think of men's and women's, women's growing faster than men's probably in the high single-digit men's in and around the category. And if you think of tops, our tops business is about a little over 20% of our business. So we -- when I joined the company, we were selling 7 bottoms to the top. I think we ended last year, 2 bottoms to a top.

There are countries like India, which is one top to one bottom, which is where we'd like to go. In quarter 4, half our growth was tops because we lean into sweaters, we lean into outerwear, et cetera. So I think probably stronger growth in tops, very similar to women's, high single digit, low double digit and hopefully getting to 1:1. So that's, I think, the -- you think about the category, that's the way to kind of think about the business.

And DTC-led is that --

Yes. And if you think of channels, DTC, high single digit, wholesale globally low single digit. And our DTC business is what I call a good trifecta is not -- we're growing same-store sales, done it now for 15 consecutive calls. We don't give the number. We did say last year, it was high single digit. We're opening 50, 60 stores. And the third -- the piece of the trifecta is growing our e-commerce business, which has been growing in the mid-teens and it's very profitable today.

And so our e-commerce business is about, I think, 10%, 11% of our business, it was half that. 5, 7 years ago, we'd like to get the e-commerce business to about 15%. And so those are the factors that give us confidence in driving a higher DTC business.

Now there are some markets, the U.S. about a decade ago, was primarily wholesale. We didn't have full price stores. It's largely an outlet business. E-commerce is very small. I think we closed last year with DTC now representing 45% of the business. Take Japan, a decade ago, Japan was 80% wholesale, very little retail. Today, DTC is 75%, wholesale is 25%. So the -- I must say right upfront that DTC growth is not going to come as a cost of wholesale, okay? For us, wholesale is critical, it's important. Growing wholesale is an important piece of how to grow, but it will probably grow at a much lower pace than DTC.

So that's the top line. Let's maybe talk about margins. I think you've thrown out there a 15% number several times in the past. Maybe talk about your confidence getting to that number and how you build there between gross margin and SG&A?

Sure. So our operating margins in '23 were close to 9%, '24, a little over 10%. Last year, we closed in the mid-11s. This year, we're guiding close to 12%, right? So let's start with -- we'll get to close to 12%. So how do you get from 12% to 15%? As I said earlier on, I think driving growth and driving profits at the same time is critical.

One of the things that we -- I talked about with our leaders 2 weeks ago was the desire to focus on flow through, which is convert a high percent of our revenue into profit dollars. We've done a nice job growing the top line. Now we have to convert into a higher flow-through to get to that.

So the way I think about it is if you get from -- how do you get from 12% to 15% I think it's basically 3 elements? Gross margins have grown very nicely over the last couple of years. And our model can or should deliver 30 to 40 basis points of gross margin acceleration every year. If you just focus on women's higher gross margin, the men's DTC high gross margin in wholesale and international versus -- that is 30 to 40 basis points.

I'm not building in pricing. I'm not even building in full price selling. We are making this real focus on driving higher full price selling because our product is hitting home, hitting the mark and we have an opportunity to drive more full price selling.

The second piece is mid-single-digit growth company should drive leverage on the SG&A. And we think that itself is probably in the same if you think of just SG&A leverage, should get us 150 to 200 basis points in operating margins. The other piece in this is we can talk distribution and network in a minute, but our distribution costs are a little over where we think there's 100 basis points of opportunity as you make this more omnichannel inventory efficiency fulfill in that 150 to 200 basis points. And if the model allows us, we can probably take our advertising expense, which runs at about 7% of revenue, up by 50 basis points. So that's our rail building block. Grow gross margin, drive SG&A leverage, and if the model allows us to spend a little bit more on advertising.

Got it. And maybe can we talk a little bit about the distribution centers that's going to certainly a little bit of a drag on the P&L as you kind of remapped the network. When do you expect that to be fully rolled out? When do you expect a full benefit? Just maybe what issues have come out relative to kind of what you thought at the beginning.

Yes. So as we talked about -- so taking a $6 billion company to close to $10 billion with DTC being more like 55% of the business and we looked at what is the infrastructure needs in the company. One was just have an ERP, which is prime for a DTC business and most retailers have moved to the new SAP. And so we are probably 60% of the journey there and so far has gone really well because it's a big data unlock, right?

And so that's one piece. The other piece was our distribution network, which required more units to be processed was not an omnichannel network. I mean in the U.S., for example, we had 4 DCs, 2 of them were 30 years old. They're largely manual, and so they needed an upgrade. And so the way to upgrade them was either you shut them down and like a remodel, just upgrade them or we thought the better option was to go with a third party who does this for a living. We run 2, they run the third. And so we signed up with Maersk. And so that's the process we're going through.

It's more automated is get to omni-channel. That's taken a little longer than we would have liked. And that's why we've had to -- we've shut 1 DC, we had to keep the other open. Our thinking is the ramp-up stabilizes sometime by the end of the first half and sometime in the second half, we shut the second DC. So that's one piece of it.

When it gets to complete when the transition is complete, we are able to drive higher throughput at a lower cost, et cetera, et cetera. We did something similar in Europe. In Europe, we built a DC because we're getting ready for capacity. And then GXO which is the Maersk equivalent in Europe said, "Hey, why don't we operate it? They cut us a check for the amount we spend."

And it took us about I would say 6 to 12 months to get that ramped up. And you've seen the European results in quarter 4 is actually a lot better now. My own view and the only example I give is we have a distribution center in the U.K. that was really servicing wholesale and stores, not servicing e-commerce, e-commerce with a third party. We brought it in-house, I think, in the end of first half of last year and it has made a big difference.

Costs are lower, we are fulfilling faster with better inventory efficiency and the U.K. business has done really well. So I think as long -- there is a bit of a transition pain right now in the U.S. in particular. But once it gets done, I think the payback is there for the making. To the question or when do you get from 7% low 7% to 6%. I think that takes a little time because it's just the efficiency, and that's why it's built into our 12% to 15% plan.

But we're getting ready for a big company more. And the -- if you think of our revenue growth last year, of 7%. I would think 60% of that was really driven by more units. So it's not entirely an AUR player. I'm a big believer you must be selling -- we must sell more while we drive higher AURs. Our plan for this year in the mid-single digit is more balanced, 50-50. So selling more units is important. That's how you grow market share. That's why we get penetrated things like tops which have opportunity, et cetera. So -- and the denim lifestyle and the focus on the growing the addressable market will only happen to sell more units.

Got it. Can you talk about the price actions that you took here actually as a result, I think it was driven by tariffs, right? And now what do you do from here just given the until we could dig into the tariff type. So we didn't price.

For tariffs, I would say, probably 1/3 of the tariff impact. And that impact was in '26, about 150 basis points on gross margin, which if you do the numbers in dollars, is close to $100 million. And so our pricing in '26, unlike pricing that we did during the inflation was we were not the first to price. We wanted to see how the market and the consumer response.

We are more thoughtful on entry-level pricing because we have so much innovation, we lean in a little bit more and took a little bit more pricing on the new stuff. And the pricing has been effectuated largely in Q1. So far, the consumer has been resilient. We have momentum. We have new products. The consumer generally seems to be in a good spot. And so as we think about the year now with everything happening on tariffs, we're just waiting and seeing how this unfolds.

But our view is that we continue to give a great price value to the consumer. We're still selling more units than we were. And so that means there is demand for the product. And so that's how we're thinking through it. We've taken a little bit of pricing in Asia and Latin America, we naturally do that to offset inflation, very little pricing in Europe, where we're leaning in, in Europe is more selling higher full price selling because the product resonates, the brand is really strong. And so that's how we're trying to get higher AURs from our European business.

Got it. And can you quantify the potential benefit on tariffs? Like do you just look at kind of like last year and what was the drag just assume that?

So the -- I think we'll give more clarity when we report Q1 in April. Hopefully, there's more clarity on tariffs. But the way to think about it, our guidance on tariffs, our guidance in '26 assumed incremental tariffs of about 20%. The administration right now is about 15%. So there is a clear benefit, assuming that stays at 15%, there's a clear benefit. And so we're in the process of quantifying and summarizing a scenario planning that piece. So more to come.

And then the question is if there is an incremental benefit, what do you do with that, right? Do you roll back pricing? If the consumer is responding well, that's something we will evaluate or you drop that into profitability. So we're working through a couple of scenarios there. We're also mindful of the potential of refunds, right? Every day is a new day on that. The international court, I think, rule that refunds have to be provided back to the companies, I think, late last week, administration and responding. The worst case scenario is we won't get refunds, the best case is refund and then what do we do with that? It's largely a onetime benefit if tariffs stay going forward, then you can use the cash to either return back to the shareholders or something different.

When you say do something different? Would that be within operationally? Would you maybe increase marketing?

Yes. I mean the good news for us, our guidance for '26 assumes approximately a 4% capital spend, right? This is opening doors, depending on technology and AI. So I don't think we need to spend more on capital. Should we exert some more store openings? Maybe. But again, it's not something that is critical.

The -- in terms of spend back -- maybe a little bit more marketing, I don't know. I mean at the end of the day, we are committed to what we guided. We're committed to growing operating margins as we grow revenue. And so time will tell what do you do with that money. We've done a fairly good job, and we sold Dockers and we returned all of the proceeds back to shareholders in the form of higher share repurchases. So we're committed to making sure that if there's excess cash, we manage that through discipline, either investments or return that back to our shareholders to the extent we can.

Yes. You mentioned the sale of Dockers, had moved on Denizen as well from -- moved on from that. you also just recently referenced coming out of a food retailer, a grocery retailer. Maybe can you talk about that. Who was that? And is there anything else that you're thinking about in terms of exiting some wholesale partnerships?

We don't name customers, and it's not on a few, you can count them in your fingertips. But basically, as we elevate the brand, the areas we're looking at call pruning or rationalizing largely places where the brand is sold at a much discounted price point. I mean, off-price is a clear example. We don't make for our price. It's largely used to flash product. When things were not great for the brand years ago, we are selling at cloud, we were selling at grocery outlets, et cetera.

So using this opportunity to kind of rationalize it. I think the -- it's about 2% of growth on our U.S. wholesale business which represents over 25% of our total business, about 0.5 point of growth. But we're still growing the company. U.S. is still going to grow. And so we're being prudent about it. And because we have other opportunities to grow wholesale, we are underpenetrated in women's. We're underpenetrated in tops, beyond what a direct-to-consumer businesses. So we think -- and then we have talked about expanding distribution with a couple of customers in the U.S. And so we're working through we have different strategy for different customers where we say, okay, can we get more floor space, can we expand and demonstrate more of a denim head to toe look.

So take Macy's in Herald Square, they've expanded the footprint for men's over 4,500 square feet. They have expanded the footprint for women's again, 4,500 square feet, giving more of a denim lifestyle look. And so with key customers, we are in conversations about now that we have the product we have a new strategy and lifestyle. Is there a way to bring that and execute that. So the consumer or customer sees it when they walk into a store. So we're working through some of the strategies with different customers.

And so as we do this, there's their customers who we can rationalize or get out of those are the things we're looking at. But there's not a multi-year activity is just a year or 2, and it will continue to drive growth, it will continually with the brand, and I think that's what we are focused on.

You guys created a lot of buzz with the Beyoncé partnership in a slightly different direction, I think that partnership is over. Is there a chance that you could revisit that at some point? Should -- is it on your radar screen that you have to anniversary that in this upcoming year? Is that going to be a challenge?

Yes. So Beyoncé was great. It started with her wanting to name a song Levi's and we got this call. And we said, yes, we'll be more than happy for you to go forward. That led to the thinking of, okay, can this be a bigger partnership because she's someone who's been in the center of culture and has been a fan of the brand for years, and we have been a fan of hers for years. And so that led to the partnership.

It also -- the strategy was would this continue to allow us to grow our women's business faster and connect with the youth. And so that's what happened. And it took the women's business to another level. Then the question was, how do you continue with that momentum. It's less about lapping, but how do you continue the momentum. And so if say, last year was where we played strongly on music, this year's music and sports.

The Super Bowl campaign was the beginning of something that built on the momentum we have with Beyoncé. And now we've got the World Cup with the Levi's Stadium, a few games are being played there. So we kind of leverage that. And so it's less about lapping it. It's about just going from strength to strength. We'll always -- we play best when we're in the center of culture, which is about music, sports, art. And so that's where around the world, in most of the art festivals, music festivals, we play a big role. It's Coachella here. It's a couple of festivals in Europe, et cetera.

And so the way we are thinking about it is that we've got a strong campaign. We've got strong influencers. The other thing we've changed is -- so if you think of our Super Bowl, the campaign that was launched at Super Bowl, it had influencers from around the world. It was not only U.S. influencers, we have influencers around the world. And that's because we are a global company, that makes a big difference. It's also locally relevant depending on which part of the world you are.

And that's really how we're thinking about it. And the ROI is pretty good. I mean, I look at that. And it's a good discussion I have with my CMO. And that's why we're maintaining the spend at 7%. We're not increasing the spend. But as you grow revenue, it means incremental advertising dollars and means incremental advertising dollars means you can spend on advertising and take it to the next level.

Sounds great. Beyond Yoga, big growth there last quarter. Maybe you can talk about the drivers of that growth, what you built into this year.

Sure. So Beyond Yoga, yes, it was up 40% in quarter 4. I think it closed the year in the mid-teens, in terms of growth rate. We -- so the drivers of the growth in quarter 4 were a couple of things. We have a new team in place, largely folks who work for Athleta and took that brand from a couple of hundred million to over $1 billion. So they know the business, experienced folks, Nancy, who runs the business ran Athleta. We've also brought in retail leaders. We brought in a wholesale leader, et cetera. So we built the team. And Q4 was the first real execution of that team in terms of product, in terms of branding and we also opened a couple of stores.

So the assortment is broader than pure women's, that's a business we bought, is now we've got is more than leggings. It's more lifestyle. We've got fleece, we've got outerwear with a performance angle to it. We've got a men's assortment today that's doing really well. We have more stores. So it's a combination of those factors. Our view is that business probably grows in the mid-teens in '26, which is faster than the category and the category growing probably mid- to high single digit.

And then at some stage, when the model is proven, we will take this international. If you ask, we had all the leaders in, 40% of them were international. They were clamoring for getting Beyond Yoga to the market. And we said, no. Let us first prove it out. We're not making money yet in Beyond Yoga. I want to it probably gets close to breakeven this year, maybe early next year. And then we'll decide to take this international. So we're thinking through that, but we're doing it in a very disciplined way.

Excellent. Maybe just one more as we're coming up on top oil prices up a ton. What's going on in your mind? What does it mean for your business? How do you handle it?

Yes. We are watching it as well because it's evolving by the minute. If you think of oil and the impact to our business, product costs, cotton -- I was looking at the cotton futures earlier this morning, they're largely where they are. We have locked in product costs for the year. So there's no immediate impact on that. The other piece is the impact on the consumer, right? It's early days. And so we're going to be watching that space.

But we have the product momentum. We have the execution momentum. So we'll be able to withstand that. And then the impact on currencies. I mean those are the 3 things. Aida and I went back and quickly looked at what happened when Russia and the Ukraine war started and oil again went through the roof. It had it had a minor impact on our business. And so while we're watching the space, we're -- right now, we're being -- I think we'll be fine.

We're also watching the sourcing because if Strait of Hormuz is kind of closed, and so the teams are working through different scenarios. We'll talk more about that when we report Q1 earnings. But given that we have a sourcing base that's spread through the world, I think we'll be able to leverage that if things tighten in one part of the world, et cetera. So I think a diversified sourcing base, product costs largely already locked in, consumer in a good spot so far. I think, will help us probably face this latest headwind in a better way than most others.

That makes sense. Harmit Singh. Thank you.

Thank you, Paul. I appreciate it.

Thanks, everybody, for joining.

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Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Fourth Quarter Fiscal Year-end Earnings Conference Call for the period ending November 30, 2025. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet, and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Company.

Thank you for joining us on the call today to discuss the results for our fourth quarter and fiscal year-end. Joining me on today's call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer.

We'd like to remind you that we will be making forward-looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements.

Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our website, investors.levistrauss.com.

Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and information provided is based on continuing operations.

Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to allow others to have their questions addressed. And now I'd like to turn over the call to Michelle.

Thank you, and welcome, everyone, to today's call. The fourth quarter punctuated a strong year defined by progress against our strategy, accelerating brand momentum and solid financial performance.

Over the past 2 years, we've taken bold steps on our journey to become a DTC-first head-to-toe denim lifestyle retailer. We've made deliberate strategic choices to maximize the potential of the Levi's brand narrow our focus by exiting noncore businesses and vigorously pursue our highest return growth opportunities.

We are becoming a more consumer-focused DTC centric lifestyle company which has led to faster growth and higher profitability. These efforts led to strong full year financial results. In 2025, we delivered organic net revenue growth of 7%, which was broad-based across all facets of our business.

Here are a few key highlights for the year. As a reminder, all numbers Harmit and I will reference are on an organic basis. First, the Levi's brand grew 7% and Levi strengthened its standing as the #1 denim brand in the world and today, holds more market share than the next two global competitors combined.

Second, we took a big step forward in our evolution to becoming a true lifestyle apparel brand by bringing to market our most robust head-to-toe product pipeline to date. This drove growth across channels and meaningfully increase our total addressable market.

Third, we accelerated our DTC transformation, growing 11%, which now comprises approximately half of our total business. Importantly, we saw significant DTC margin expansion in 2025 as we delivered high single-digit comp growth for the year and a more efficient operating structure in both stores and e-commerce.

Fourth, our wholesale channel continued to deliver more stable growth, ending the year up 4%, fueled by our expanded lifestyle assortment as well as new distribution.

Fifth, our growth in women's continued to accelerate, up 11% for the year, with both tops and bottoms delivering double-digit growth in addition to 5% growth in men's. And while we drove significant top line growth, we also delivered our highest ever gross margin as well as adjusted EBIT margin expansion.

Now turning to details of the fourth quarter. Total company revenues increased 5% on top of 8% growth last year. And this momentum continued through the holidays with 7% growth during the November, December holiday season. Reflecting strength across both DTC and wholesale channels. This marked our highest revenue for the holiday period in at least a decade.

First, I will walk you through the progress made against our brand-led strategy, which centers around how we're amplifying the power of the Levi's brand through an innovative and breast product pipeline in culturally relevant marketing.

In Q4, the Levi's brand grew 4%, driven by strength in men's and even higher growth in women's. Growth in men's and women's continues to be driven by both our core as well as the newness we've introduced throughout our assortment.

A testament to the strength of the brand, in 2025, we cemented our #1 position in men's, women's and in our key use demographic of 18 to 30 year olds in the U.S. These share gains are supported by strong brand heat reflected by higher social media engagement and meaningful gains in brand equity versus last year.

In Q4, we continued to fuel our global brand momentum while strengthening our relevance in local markets. We unveiled a number of unique collaborations. Examples of these include a premium collection with [ Barbore ] and a limited edition footwear launch with Nike and Japanese Streetwear Icon [ Ego ]. We celebrated our final chapter of the reimagined campaign with Beyonce and launched our global campaign targeted at men featuring [ Chibozzi ] and [ Matti Matheson ]. And we also reinforced our long-standing link to music culture by celebrating a full decade as an official sponsor of Corona Capital, Mexico's largest music festival, putting the brand front and center in our second largest market.

Moving to product. Our evolution into denim lifestyle is resonating, and the Levi's brand is gaining even more share of the closet as our top business continues to accelerate. The top reset we initiated a few years ago, bringing in new internal talent, new vendors and enhanced capabilities is paying off today.

In Q4, tops grew double digits driving nearly half of our revenue growth and meaningfully higher AURs versus last year. Strength was broad-based reflecting growth across men's and women's, which was driven by strong demand in our elevated assortment of sweaters, wovens and outerwear.

Tops will continue to be instrumental to our denim lifestyle strategy. And while we're pleased about our progress to date, we are just getting started as a destination for the tops category.

Within our bottoms business, we are showcasing our most diversified portfolio yet with everything from our core icon to our innovative fashion feds and non-denim bottoms, all delivering growth.

While skinny and straight fits remain popular, loose and baggie styles continue to accelerate. New styles like the 578 Baggie for him and our expanding Barrel family for her are fueling momentum as we own more of the denim market in both his and her closet.

In Q4, we successfully completed the global rollout of our Blue Tab collection, which represents the most premium expression of our brand. While we are still in the early stages, the strong consumer response to this collection gives us conviction in the opportunity in the premium segment of the market, which is sizable and largely underpenetrated by the Levi's brand.

In 2026, we will further expand the assortment and roll it out more broadly across our DTC business as well as select premium wholesale accounts.

Looking to 2026, we entered the year with a robust product pipeline and a brand that's more culturally relevant than ever. For the first time in more than 20 years, Levi's will debut its newest ad during the Super Bowl, which will be hosted at Levi's Stadium, marking the launch of our new global campaign that will run through 2026. With this kickoff, and more major global moments to come, including several World Cup games to be held at Levi Stadium this summer, we are energized by the runway ahead and confident in our ability to keep driving the Levi's brand forward.

Now shifting to our next strategy to be DTC first. In Q4, our global direct-to-consumer business delivered another quarter of double-digit growth, up 10% and posted its 15th consecutive quarter of positive comps. We generated another quarter of high single-digit comp growth, reflecting positive performance across all store KPIs, including traffic, conversion and UPT, in addition to AUR growth across every segment.

In Q4, we opened 47 net new system stores, including mainline locations in Japan, India, Thailand and Korea as we continue to expand our DTC presence in Asia. Over the past year, we have transformed our retail operations, both in stores and online, improving the consumer experience and store productivity. We've enhanced our in-store lifestyle merchandising, highlighting our broader assortment of head-to-toe looks. We've improved our assortment planning and life cycle management, resulting in lower promotions and higher full-price selling. And we are rolling out a new global selling model for our store team, which will deliver operational efficiencies and improved consumer engagement.

We are still in the early stages of what we believe is a significant opportunity to continue to improve our DTC margins, which will be a key driver of our overall company margins.

Our efforts to build a strong digital foundation have enabled us to accelerate our e-commerce business. And in Q4, we delivered another quarter of very strong e-commerce growth, up 22%. We are leveraging AI to make online shopping easier and more inspiring for our fans.

We recently launched outfitting an AI-powered feature in the Levi's app that creates style looks using our full assortment, purchasing behavior and product imagery. This year, we'll evolve outfitting with even more consumer-centric customization and we'll launch a new consumer-facing AI stylist chatbot that enables personalized recommendations through conversations.

We are also continuing to scale the use of AI and advanced analytics across the organization as we accelerate our shift to a best-in-class direct-to-consumer retailer. For example, we recently announced our plans to develop and deploy an integrated Agentic AI platform to simplify and automate cash-driven work throughout the organization, driving efficiency, productivity and enabling growth.

Built in partnership with Microsoft and as a frontier firm in the industry, we're currently testing this technology and plan to roll it out to employees this year.

These initiatives are rewiring the company for a bold future creating meaningful opportunities to enhance consumer experiences while unlocking additional operational efficiencies.

While DTC continues to drive outsized growth, wholesale continues to be an important channel for us to amplify the brand and reach our consumers where they choose to shop. Our global wholesale business was flat for the quarter and ended the year up 4%. The channel has stabilized over the past year as our efforts to elevate the brand and to broaden the assortment gain traction.

Now turning to our third strategy, powering the portfolio. In Q4, our international business grew 8%, led by an acceleration in Europe and solid growth in Latin America. International comprises nearly 60% of total sales. And given the strength of the brand and our expansion into lifestyle, we see an immense opportunity for continued profitable growth outside the U.S.

Beyond Yoga was up 45% in Q4, fueled by the positive response to our Seek Beyond campaign launched in Q3 and product expansion into new categories across active lifestyle.

DTC performed particularly well, and we opened 4 new stores in the quarter. Beyond Yoga ended the year up 17%. And as we look to 2026, the brand will continue to expand its retail presence in new markets and launch the next iteration of our broadened lifestyle assortment.

Looking ahead, I am more confident than ever in our future potential. While we continue to navigate a dynamic global environment, we do so from a position of strength with an iconic brand, deep connection with our fans and the agility to adapt and grow. Our strategies are working, and we have the right capabilities and team in place to continue to drive momentum in the year ahead. We'll keep building our denim lifestyle leadership by bringing fans fresh new products across every category, while continuing to celebrate the iconic styles that have shaped generations.

And we'll continue to keep Levi's at the center of culture through a focus on sports, music and youth, showing up powerfully on the world's biggest stages and sparking excitement that deepens our cultural relevance globally.

All of this is supported by our continued commitment to drive operational excellence and to strengthen our execution grounded in a focus on discipline, accountability and performance.

I'd like to thank our incredible talented and passionate team for driving our transformation into the world's denim lifestyle leader and delivering outstanding service to our fans every day.

Together, we are building a stronger foundation for sustainable, long-term value creation. And with that, I will turn it over to Harmit to review our performance in the fourth quarter, the year and expectations for 2026. Harmit?

Thank you, Michelle. 2025 was a strong year with continued consistent profitable growth for our company. I am pleased that our growth has accelerated over the last 3 years and we have established ourselves as a consistent mid-single-digit growth company, which we expect to continue in 2026. .

We've also made progress each year on expanding margins, both gross and operating, while driving higher returns on invested capital, ending the year at approximately 16%.

Our 2025 financial results reflect the strength of our business and demonstrate that we have the right building blocks in place to drive long-term sustainable growth. Our focus on denim lifestyle has enabled us to accelerate growth by expanding our total addressable market with our broadened assortment of non-denim bottoms, tops, dresses and skirts, which contributed to almost 1/3 of our growth in 2025.

Our disciplined approach to converting growth into profitability improved adjusted EBIT margin by 70 basis points in 2025. And we achieved this while navigating higher tariffs and investing in remapping our distribution network as we build the road map towards becoming a $10 billion DTC first company.

In 2026, we will continue to grow adjusted EBIT margins through our relentless focus on driving higher revenue flow-through while making the right investments for our long-term growth, including growing our store base AI capabilities and marketing. In addition, we're making meaningful progress on mitigating tariff impacts on our P&L through targeted pricing actions higher full price selling, lower product costs and prudent management of our cost base.

Now let me walk you through the specifics of our fourth quarter performance. Organic net revenues grew 5% and were up 13% on a 2-year stack. Our outperformance was driven by better-than-expected results across channels and geographies. As we have seen throughout the year, both AUR and units contributed to our growth this quarter. We expect both price and unit growth to drive the top line in 2026 and beyond.

Gross margin for the quarter was 60.8% of net revenues, contracting 100 basis points relative to last year, in line with our expectations primarily due to the impacts of tariffs, which were partially offset by pricing actions and higher full-price selling.

In the first quarter, we implemented additional pricing actions to further mitigate tariffs. And while it's early, we are not seeing any impact on consumer demand thus far. Adjusted SG&A dollars grew 2.6% due to the sales upside driving higher selling and incentive expenses. Higher costs associated with the transition of our U.S. distribution network and unfavorable foreign exchange.

A brief update on our distribution network transformation in the U.S. While we're making progress, the transition to the new third-party distribution center has taken longer than we expected. We've been working to fulfill our high demand by continuing to operate our own distribution center, which has led to higher transitory distribution costs which we expect to continue to incur through the first half of '26.

We successfully executed a distribution transition from owned and operated to a hybrid model in Europe last year. Enabling us to fulfill our strong demand as evidenced by the double-digit revenue growth in the quarter, while improving our profitability in the region. This gives us confidence that we will successfully complete the transition in the U.S. this year.

Moving down to the EBIT line. Adjusted EBIT margin contracted 180 basis points to 12.1% related to the impact of lapping the 53rd week and tariffs. This was slightly lower than our expectations due to the three reasons I mentioned before, within SG&A. That is unfavorable for FX, higher distribution costs and incentive compensation.

Fourth quarter adjusted diluted EPS was $0.41 higher than expectations. This includes a $0.03 headwind from a higher tax rate. We ended the year with reported inventory dollars up 9% to prior year and units up 2%. The year-over-year dollar increase was primarily driven by tariffs. We continue to believe our inventory quantity and quality are well positioned globally and expect inventory levels ending fiscal '26 to be below revenue growth.

Turning to dividend and share repurchases. In quarter 4, we returned $55 million to shareholders. And for the full year, we returned $363 million, up 26% versus prior year. This included a 7% increase in the dividend versus last year. And the $150 million share buyback in '25 was the highest annual buyback since the IPO. And today, we are announcing a $200 million ASR program, which will be completed within 3 months, but no later than 6 months reflecting our confidence in our future and continued efforts to drive shareholder value.

Now let's review the key highlights by segment for the quarter. The Americas net revenues were up 2%, and our U.S. DTC business grew 6%, driven by strength in both brick-and-mortar and e-commerce.

U.S. wholesale was down due to capacity constraints in our new [ 3PL ] as well as strong growth from a key digital wholesale customer in the prior year. Our LatAm business was up 8%, fueled by growth across most markets and continued strength in DTC.

Operating margins, which were up for the year contracted 460 basis points in the quarter, primarily due to the lapping of the 53rd week and the impact of the tariffs.

Europe net revenues accelerated up 10% in Q4, and led by double-digit growth in our largest European markets, the U.K. and Germany. We delivered strong holiday performance and growth across all categories, including men's, women's, tops and bottoms.

Gross margin expansion and SG&A leverage resulted in operating margin growing 330 basis points versus prior year. Europe's operating margin for the full year grew 180 basis points.

Asia net revenues grew 4% year-over-year, fueled by strong DTC performance. Key markets, including Japan and Turkey delivered double-digit growth this quarter as a head-to-toe lifestyle offerings continue to resonate with consumers and drive growth.

Operating margin expanded 140 basis points versus prior year, driven by gross margin strength. For the full year, Asia grew 7% and operating margin expanded 60 basis points.

Now let's turn to our outlook for fiscal '26 and Q1. We are pleased with our Q4 results and with our trends in the first quarter, including a successful holiday period. Looking to '26, we expect organic net revenue growth of 4% to 5% with 1 point favorability from foreign exchange, resulting in reported net revenue growth of 5% to 6%.

By segment, we expect the Americas to grow low single digits, Europe mid-single digits and Asia mid- to high single digits. By channel, we expect DTC to grow high single digits, fueled by positive comp sales opening 50 to 60 net new system dose and continued growth in e-commerce.

Global wholesale is expected to be flat to slightly up, given plans to rationalize our wholesale footprint, particularly a few nonstrategic accounts in the U.S. in support of our brand elevation strategy.

Gross margin is expected to be flat to prior year. This includes an approximate 150 basis points gross impact from tariffs, which we plan to offset with pricing actions, higher full price selling product cost reduction driven by lower cotton rates and vendor negotiations, SQ rationalization and favorable mix.

FX is expected to be a 20 basis point headwind to gross margin. While these mitigation factors will begin to flow through the P&L early in the year, we anticipate the pace of benefit realization will accelerate as we progress through 2026 with a more meaningful contribution emerging in the later part of the year.

The fundamental drivers of our gross margin expansion, which are mixed, higher full price selling, continued product cost reduction remain intact positioning us well for resume full year expansion in 2027.

We expect our full year adjusted SG&A rate to improve by approximately 40 to 60 basis points as the organization is increasingly focused on driving operating leverage. This is driven by cost actions to mitigate tariffs, expansion of our global talent hubs limited head count increases as we drive productivity and efficiencies by expanding AI usage and easing costs from running parallel distribution centers in the second half of the year.

For the year, we expect marketing spend to be approximately 7% of total revenues flat to 2025. As a result, adjusted EBIT margin is expected to expand 40 to 60 basis points in the range of 11.8% to 12%.

Given our mid-single-digit growth and our focus on growing gross profit dollars ahead of SG&A dollars, we do expect to leverage for the full year.

We expect the full year tax rate to be around 23%, 2 points higher than [ 25 ], and interest expense is expected to be approximately $12 million a quarter. Full year adjusted diluted EPS is expected to grow and be in the range of $1.40 to $1.46. This includes a $0.04 headwind from a higher tax rate and a $0.20 drag from the higher gross impact from tariffs, which we are fully mitigating.

CapEx should be approximately $230 million, 3.5% to 4% of revenues primarily to support store openings, fleet improvements and our digital investment.

Before I discuss our Q1 guidance, I wanted to give some color on the cadence of the P&L for the year. We expect consistent mid-single-digit revenue growth throughout the year, with Q2 slightly lower due to seasonality.

We expect gross margin to improve in the second half as we realize the benefit of pricing and lap the impact of tariffs.

On a full year basis, as previously mentioned, we expect marketing spend to be 7% of total revenue. However, this spend will be Q1 weighted given the timing of our global marketing campaign, which kicks off in February with the Super Bowl. Because of this, we expect Q1 spend to be approximately 160 basis points than Q1 '25 and lower in the remaining 3 quarters of the year.

As a result of the Q1 marketing phasing, operating margin is expected to contract versus prior year in Q1 '26 and then expand as gross margin expansion and operating cost leverage take hold, driving full year growth.

Now turning to the first quarter of 2026. We expect organic net revenue growth of 4% to 5%, consistent with our full year forecast and a 3-point FX tailwind in resulting in 7% to 8% reported net revenue.

On a 2-year basis, this is an acceleration from Q4 '25 and demonstrates that we are maintaining momentum. Gross margin is expected to be slightly down versus Q1 '25, primarily due to the continued impacts of tariffs. As noted earlier, we have already implemented further pricing actions earlier this month and additional pricing actions will occur in February.

Adjusted EBIT margin is expected to be down 140 basis points versus Q1 '25 to 12% on primarily driven by the timing of the marketing campaign. While the production costs are expensed in the first quarter, we expect to benefit from the campaign through the course of the year. Excluding A&P timing, adjusted EBIT margin leverages in Q1. And in Q1, we expect adjusted diluted EPS to be between $0.35 to $0.38. This includes a $0.07 drag for -- from [ A&P ].

In closing, 2025 was another solid year for us, while accelerating top line and bottom line, evidencing the success of our strategies and our transformation to a denim lifestyle DTC first company. We entered '26 with strong momentum and a maniacal focus on expanding operating margin with a robust product pipeline, growing TAM and clear plans to mitigate tariffs, along with a talented and experienced management team, we look forward to another year of consistent growth and margin expansion.

Beyond '26, we are confident about what's ahead. iconic brand, global reach and relentless focus on growth and cost management will continue to create lasting shareholder value well beyond 2026. And with that, [ Latif ], let's open up the line for Q&A.

[Operator Instructions] Our first question comes from the line of Laurent Vasilescu of BNP Paribas.

I'd love to ask about gross margins. Harmit, you've historically beaten your initial gross margin guide, are you taking the same conservative stance as in prior years with this guide of flat gross margins? How should we -- I think you talked about sequential improvement on the gross margin for the year. But can you maybe just find our point -- how do we think about the first quarter gross margin? Because I think expectations were a little bit higher for 4Q? And can you maybe just unpack a little bit more the drivers on cotton transit and the offset on tariffs for the bridge for the year.

Thanks, Laurent. I was a gross margin question for you is right on the money. But -- let's start with a little bit of the history. Gross margin. We have established a track record of consistent gross margin expansion, as you said. Our algorithm talks about expanding gross margin regularly every year. Last year, [ 25% ], we grew gross margins 110 basis points. And over the past 3 years has grown about 400 basis points. And I'll talk a little bit about the structural drivers, which are intact.

Talking about '26, our guidance is, at this time, flat to prior year. What we have done nicely is offset the full impact of tariffs as the year progresses. So tariffs, as I mentioned in my prepared remarks, impacts gross margin adversely by about 150 basis points. And we have an FX headwind of about $20 million. We are fully offsetting this with higher pricing. Most of this has been implemented -- we are not seeing any initial demand reaction to it. So the [ elasticity ] is pretty good, more full-price selling, which is something that we've been focusing now for about 12 to 18 months. Especially as a product and newness is resonating well with our consumer.

And then lower product costs, which is a combination of better and lower cotton as well as the negotiation with the vendors as we rationalize SKUs reduce unproductive assortments, et cetera, et cetera.

So -- and the only thing I would say is the structural benefits, which is growing more aggressively, [ think ] like women's, which is higher gross margin than men, DTC, which is high gross margin in wholesale and international, which is a high gross margin than the U.S., that's intact. So as we think about '26, I think the way we flow this is first quarter will be slightly down than a year ago because the pricing gets effectuated and improves and accelerates in terms of year-over-year performance as the year progresses and we start lapping tariffs.

And as we think about '27, Laurent, our view is this is -- we don't guide '27 right now, but our view is the structural aspects that we're focused on growing, which is through mix, which is DTC, women's and international will resume the acceleration of gross margins in the years to come. So that's how we're thinking of gross margins. And I hope that answers your question.

Our next question comes from the line of Matthew Boss of JPMorgan.

So Michelle, how does your mid-single-digit organic outlook for this year, size up to the denim category? Maybe where do you see opportunity to increasingly move to offense this year?

And then Harmit, on that topic, could you elaborate on the acceleration to 7% organic growth in November and December, I think that's on top of 8% growth a year ago, so a mid-teens 2-year stack. Just could you speak to the strength that you're seeing? And have you seen any softening in top line momentum post holiday?

Yes, I'll start with your first one. We feel really good heading into 2026. I mean I'd say it's clear that our strategies are working. And just as '25 was a strong year, plus 7% organic growth. We're expecting 2026, as you said, mid-single digit, 4% to 5% organic, 5% to 6% on a reported basis.

Highlights from my standpoint, are number one, I'd say that we are in the best shape that we've been in decades, both operationally and financially. '25 is certainly a good proof point of that. Our strategies of being brand-led, DTC first and power in the portfolio are clearly working, and they're driving broad-based growth across channels, categories, genders, and I think what's really exciting is we're making this big transformation, as you know, from a denim bottoms business to a true head-to-toe denim lifestyle company.

So when you think about 4% to 5% mid-single-digit growth ahead, we do expect that to outperform the category. I mean the category, if you're talking just denim, it is accelerating globally. And as a leader, we are fueling that growth.

On that note, in the U.S., which is also growing, we have cemented our position as the #1 share for men's, women's and youth. And it's the first time that we can remember that all three of these targets have grown share and are #1. So it gives us tremendous confidence that strategies aren't changing. We're leaning in and we're executing.

And the last point I would make is, just as we plan to continue to fuel the denim category, we've expanded our total addressable market, right? We're no longer just in denim bottoms. And in fact, as Harmit mentioned earlier, about 1/3 of our growth this past year was driven by categories outside of denim bottoms. So speaking to top which had a really fantastic year, up double digits. We expect that tailwind to continue.

Non-denim, again, it's growing fast. We expect that to continue. And then, of course, as we think about the women's business, women's had a great year, up 11%, but that head-to-toe dressing yes, being relevant in fashion and blue bag, all the icons, but then also in skirts and dresses, tops. So there's a lot of runway as we look into 2026 and beyond.

And to your second question, Matt, I think holiday is strong for us. It centers around two strategies. One is DTC. So as we become a DTC-first company, as a team, we're really focused on making sure we win in holiday. We made sure there's newness on the floor make sure the product that is being innovated was both with our wholesale customers as well as in our stores and our e-commerce platform. And the teams really executed really well. So that's fact number one.

Fact number two, is just building on the TAM point that Michelle has talked about, that centers around the denim lifestyle focus.

The mix I would like to bust is that we are -- we're just not only denim bottles. We have more than denim bottoms. I mean this is more of a head to store, lifestyle, denim-focused company. So think about the other way. Our teams shut out to our product teams and merchants, product led by [ Karen ], [ Helman ] and our lead merchants. The we sold a lot of sweaters, more than we have sold in a long time. We sold a lot of Chino. So I can go and just talk about the different products that were introduced in holiday that really help. So -- and that's what gives us the confidence that we can grow Q1 and a 2-year stack at 14%. You talked about November and December at 15, but for the quarter, that gives us the confidence and sustaining the 7% organic growth with [ 4 or 5 ] organic growth in 2026.

Our next question comes from the line of Jay Sole of UBS.

Michelle, on the prepared remarks, you made a comment that you believe that the direct-to-consumer channel margins can move higher. Can you just dive into that a little bit and tell us what are the drivers? And where do you think the margins can go from where they are today?

Yes, absolutely. Thanks, Jay, for the question. We absolutely believe that there's a lot of upside in DTC, both from a revenue standpoint and margin as I commented earlier, 15 quarters of positive comp growth.

So first of all, margin growth will come from leverage. Call it, sales productivity as we continue to drive higher volumes, we'll clearly leverage off of the fixed cost in our store which includes your real estate, your fixed labor, just a lot of those, like I said, fixed costs.

Secondly, I would say is we are really focused on retail excellence. That had a big impact in expanding our store margins this past year, and that will continue. So we're stepping up our operations capabilities. That includes things like enhanced lifestyle merchandising. So when the consumer is coming in, they're not just buying a pair of bottom, they're also buying the top. So driving UPTs, driving average ticket price, et cetera, improved assortment planning and life cycle management.

We talk about rewiring this company to be a retailer, and that's happening. We put new systems in place. We're in the midst of rolling out a new planning and allocation system that's going to benefit sell-through, keeping us in stock. So -- and I would say, historically, that wasn't, of course, strength growing up as a wholesale company. That wasn't a core strength of ours. It has to be now. And you see it in the numbers to date, you'll see it going forward.

And then lastly, I would say, again, operating with a retail merchant mindset is the selling model. And we have a new global selling model that's rolling out worldwide. So our expectation, the margin expansion that we saw this past year, we expect that to continue. We feel really good.

Our next question comes from the line of Bob Drbul of BTIG.

Congratulations on a nice quarter. I guess I was wondering if you could focus in on Europe a little bit more, either country trends or into the Blue tab business have a big impact and those results are there look pretty good.

Thanks, Bob. So first, a big charter to the Europe team. They had a phenomenal year. They were up in the mid-single digits. The strength in Europe for the quarter was up 10%. End of the year really strong. and entering '26 with momentum. The strength was evident I talked about U.K. and Germany in my prepared remarks being up double digits.

But you think about the channels, both channels wholesale actually led the way with 13% growth. And you look at the other markets, Bob, most markets grew in Europe. Again, very strong holiday. The team in Europe does a great job executing against the strategy. Women's was up 10%, men's was up 9% as an example. And then e-commerce was up in a big time.

So overall, really strong results rate-driving growth is one thing, but it's important that the growth translates to profitability and it translated operating margins up 380 basis points. So let's think forward. '26 we are signaling Europe grows mid-single digits. And you think of the prebook, which is the first sign of the wholesale customer will shop, our prebook is up mid-single digit. So I think that's just the thinking about Europe for '26 and what drove '25.

Okay. And on Blue Tab, do you want to...

So, yes. No, happy to talk. So Blue tab is clearly a global opportunity for us. So yes, in Europe, but across the globe. And we're really excited about this because we think this presents a new business for us.

The premium category is largely untapped for us. It's sizable. It's growing, and we're significantly underpenetrated. So early signs for Blue tab are very positive. We just rolled it out early in 2025. And it is the pinnacle expression of our brand, very elevated, commanding price points for bottoms for $200 to $350 million, truckers $250 $400, the list goes on. And we're early -- in the early stages, we're testing, we're learning, we're scaling, but it is showing that the consumer is responding and that we have permission to play in this elevated premium market.

And we have -- we've also had green shoots through the collaborations that we've done for a long time, which have commanded those really elevated price points. But now we're really going to lean in. It isn't going to be these in and out collaborations. We see it as an ongoing business that not only will represent a commercial opportunity, but it's a great halo to the entire line. So I think more to come, but we're bullish on really getting into this premium category.

Our next question comes from the line of Oliver Chen of TD Cowen. Oliver. .

This is Gabriel [indiscernible] on for Oliver. We're just curious to hear a little bit more about any improvements that you're seeing within supply chain and progress that you're making on shortening go-to-market within your products? I know you mentioned AI being an efficiency driver within the corporate setting, but would love to hear any additional color on supply chain.

Why don't Harmit and I both take this one. Let me talk about kind of end-to-end supply chain as it relates to product development. And I think Harmit can speak to our distribution transformation.

So yes, as you know, we've been on this journey as we pivot to become a DTC retailer to shorten our time line, drive global consistency, et cetera, and we're making good progress. We've taken a few months out of our end-to-end lead time. So we've shortened that from what was 16, 17 months down to 14 months. We're now focused on creating different tracks of products.

So for example, in tops, we're going after shorter cycle times, looking at vendors who are closer to the point of distribution, et cetera. We have a new Head of Supply Chain, [ Chris Callieri ], who comes with deep experience in vertical retail and has a very strong strategy to go after those opportunities. So that's point number one.

Point number two, a key enabler to that. is driving greater global consistency. So what used to be we've always developed our products here in San Francisco, but it was more kind of a bottoms-up approach. Now what we've seen is really more of a tops down but having a globally directed line. So for perspective, back in like '23, early '24. Our globally directed line was about 20%. We're now 50% on our way to 75%.

And with that, it clearly drives a lot of efficiency. So over time, you'll see that show up in inventory turn and sell-through and productivity. And also, it allows us to really get behind those big bets from a marketing standpoint and leverage our resources.

So the second and then the third piece, somewhat related is we continue to be really focused on reducing our SKU count. And we are still ranging in the reduction of about 20%, 25%. Again, all of these things will help enable margin accretion over time.

Yes. And on the -- Gabriel due to the question on distribution. Just by context, 2 years ago, we began remapping both U.S. and distribution network to a more hybrid automated omnichannel model, largely done with the intent to support our long-term growth and ensure we meet growing consumer demand. Europe, as I mentioned in my script fully transitioned, and we're seeing clear top line and bottom line opportunities.

In the U.S., the ramp-up has taken a little longer than we expected. And so we supplemented this by ensuring that one of our own facilities stay open a little longer as well as increase the manual operation because, to be honest, the demand outstripped our expectations given the wonderful product that we have and we have introduced in the marketplace.

We brought in distribution experts into our organization, helping us complete the transformation. We're working with our third-party leading logistic partners, and so we are confident of completing this by the end of the year. And as you saw from the Europe numbers, when it is complete, it does make a big difference to top line and bottom line.

[indiscernible] of Rick Patel of Raymond James.

Congrats on wrapping up a strong year. We wanted to double click on the delays related to the new DC. So can you provide additional color there? And what gives you confidence it will come online in the back half? And then as we think about the SG&A impact, what's the right way to think about the impact that DC will have as we think about the transitory costs in the first half versus what should be a sizable opportunity to drive leverage from efficiency in the back half.

Yes, sure. Thanks for asking the question. What gives us confidence is a couple of things. One, we've got a great team on our side and a great team with our third-party logistics partners working together to try and solve it and do it in a way that we are able to meet consumer demand while setting ourselves for the long term.

So that's a fact number one. Fact number two is, I mean, this is a daily, if not a weekly discussion. And Michelle and I -- and the top teams management teams on the other side are directly in conversations. And the other only proof point I would have out there is we've seen it happen in Europe. There's no reason why it shouldn't happen in the U.S.

So that's addressing your question to the question on SG&A. Our focus on SG&A has risen to an all-time high within the company. I think you can ask the entire management team and the company, they'll say, this is a group that really wants to drive more leverage. And the best way to explain this, Rick, is to say, let's convert a higher percentage of our gross profit dollars into EBIT dollars.

What gives us confidence in 2026 is a few things. One, a higher volume, 4% to 5% organic or 5% to 6% reported should leverage. Second is, I think, Jay, you asked a question about DTC productivity. Again, a mid- to bust, higher DTC doesn't mean lower EBIT margin. So you think about last year, our DTC margins were up 300 basis points. So EBIT margins were up. We've got plans to grow DTC margins even in 2026.

The other thing is we have limited head count increases. And the way we're doing it so that we manage growth with resources is really leverage the user AI, and we've got global talent hub, which is centered around the world across all functions where we're leveraging talent and that should help us offset some of the cost increases.

And to your question about distribution costs, we feel the pallet running of the DTC, that pressure eases by the first half of the year. So you start seeing some of the benefit in the second half of the year, and you see that in the P&L.

And overall, our SG&A rate as a percentage of revenue, which we have always said will be around 50%. We think in '26 will be lower than that.

Our next question comes from the line of Tracy Kogan of Citi.

It's actually, Paul, pleasure from Citi. You mentioned several rounds of price increases I was wondering if you could just talk about where those are happening and magnitude and maybe tie that into your assumptions for growth by geography in F '26, as you think about the breakdown between price versus units in each of the three geographies you mentioned.

Sure, Paul, I'll take that one. So yes, as we talked about earlier, we are taking, call it, thoughtful targeted pricing actions as part of our tariff mitigation, and that's largely happening in the U.S., although as ordinary course of business, we do take pricing around the world as we mitigate things like inflation and the like. But our focus for the most part was here in the U.S. I will say we have not seen any consumer or customer reaction to date, which I think is a testament to the strength of the business the momentum we have and the consumer responding to our product, our marketing efforts. And I would say that we have pricing power, given how strong the brand is right now, the market share gains.

So where it's appropriate, especially in our higher tiered and newness innovation, we're leveraging that pricing power, while at the same time taking more modest pricing and being very diligent on, call it, those Tier 3 lower-priced entry-level prices.

So the teams, we have more data and more sophisticated models than we've ever had, leveraging AI as a matter of fact. So informed by market analysis, demand elasticity and, like I said, being very targeted on how we took that pricing.

We took some last year fairly modestly. We have more. And that was mostly from a to our customers. Now from a consumer-facing standpoint, we do have pricing going in both in DTC and in wholesale in February. We'll be staying really close. But again, we have confidence as we head into 2026.

And to your point on AUR versus units, we're expecting like we saw this last year, we're expecting both to grow in the coming year.

Difference by geography in terms of the AUR first units I would imagine with the U.S. price increase?

We don't necessarily guide at that level by geography. But the fact that we're expanding TAM, and we're really focused on driving higher units per transaction which means that we are saying you're coming to buy a denim bottom or non-denim bottom there is now a great top available for you. That should drive units around the world. Thanks, guys.

Our next question comes from the line of Brooke Roach of Goldman Sachs.

Harmit or Michelle, I was hoping we could drill down a little bit deeper into your growth assumptions for the Americas business in 2026. It sounds like you have some strong momentum in DTC. You're taking a little bit of price. You sound pretty positive on units. But the growth would suggest that things are a little bit more challenged there. I think you mentioned that U.S. wholesale is going to go through a bit of a rationalization this year. Can you help us understand what's happening there and where the opportunity for upside is in your Americas business this year?

Sure. So Brook, overall, the U.S. grew in '25 by 4%. DTC was the standout, growing 6%, but wholesale also grew in the year. I think in the quarter, U.S. was flat. That is largely driven by, as I mentioned in the call, two factors. One was we were lapping a high sale in '24 from a large digital customer that was just timing and the capacity constraints on the DTC. And if you exclude that, are you adjust for the impact of that.

Actually in the quarter, U.S. and U.S. wholesale would have been up low to mid-single digits. So U.S. has had a great year.

To your question about next year, our expectation is the U.S. grows low to mid-single digit. Wholesale globally, our view is flat to slightly up. And that's largely driven by the rationalization of some nonstrategic accounts in the U.S. I mean, as we focus on elevating the brand and taking this business to the next level.

Our view on wholesale is that it's a important channel for us. In fact, a key channel allows us to reach a lot of fans and the broader assortment that Michelle referred to in our prepared remarks, et cetera, as they resonate with the consumer and DTC, we're able to take to wholesale. And I think that should drive growth over time.

Our next question comes from the line of Tom Nikic of Needham.

I wanted to follow up on Brooke's question there. recognizing that there's the headwind from some of the wholesale rationalization in the U.S. I'm just wondering what the business looks like in your strategic wholesale counts in the U.S., how have sell-through rate been? How are the order books shaking out, et cetera, just what does it look like among the strategic accounts in the U.S.

You bet. Tom, I'll take that one. Thanks for the question. First, I think it's important to reiterate that we believe in the wholesale channel. This is really an ant story versus [indiscernible]. Yes, DTC, we expect to continue to outperform. But over the long term, we expect wholesale to be slightly positive over time. We've guided about flat for next year. And I think we're guiding that despite the fact that we are rationalizing in some nonstrategic accounts, things like, I would say, the grocery channel that we're -- we show up in today in the U.S. . So I think it's a good thing for the brand. And again, we're driving to flat even despite some of these account decisions.

As it relates to our core strategics, I think the partnerships are really strong. These accounts are embracing denim lifestyle, tops, men's and women's, I mean, really Levi is getting into the tops category in wholesale in a meaningful way is a new step forward for us. Women's our accounts have really embraced our women's strategy, and you'll see that in key accounts where they've expanded the footprint. In some cases, we've expanded doors. And then it's head-to-toe denim lifestyle getting into new categories like skirts, dress , et cetera. So we really do see it as a complement. And I think one of the really great things is that in DTC, we can launch products first and they get to see the results and then we can take them to wholesale. And we've seen that model play out. One of our big hits of the year was the [indiscernible] baggie, and that took off both in DTC and in wholesale.

As we look ahead around the world, for example, we had positive growth in Europe even in the quarter. The order books are positive for next year. Latin America, again positive for the quarter. So net-net, I think it's a really good story as we've expanded our addressable market to expand these categories. And let's not forget, even in Q4, from a total business standpoint, we grew market share in men's, women's and that use target.

So I'll wrap it up by saying we're bullish across all channels, and there's so much opportunity for Levi's in our core down and bottoms business and head to toe lifestyle.

Thanks, everyone, for joining the call, and we look forward to talking to you next quarter.

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

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Third Quarter Fiscal 2025 Earnings Conference Call for the period ending August 31, 2025. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company.

This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com.

I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Company.

Thank you for joining us on the call today to discuss the results for our third quarter of fiscal 2025. Joining me on today's call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer.

We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements.

Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measures are included in our earnings release available on the IR section of our website, investors.levistrauss.com.

Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers, unless otherwise noted, and the information provided is based on continuing operations.

Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Today's call is scheduled for 1 hour, so please limit yourself to 1 question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn the call over to Michelle.

Thank you, and welcome, everyone. What I'll share today builds on the themes I've been emphasizing this year as we pivot to become a DTC-first head-to-toe denim lifestyle retailer. The consistent execution of our strategic priorities is driving a meaningful inflection in our financial performance. And today, I'm pleased to share that we delivered another very strong quarter with upside across the P&L giving us the confidence to raise our full year revenue and EPS guidance.

In Q3, we delivered our fourth consecutive quarter of high single-digit organic revenue growth. Strength was once again broad-based across our business including DTC and wholesale, international and domestic, women's and men's and tops and bottoms. Our growth was led by continued strong sales and profitability in our direct-to-consumer channel, up 9% and fueled by strong comp growth as well as solid performance in global wholesale.

Our largest market, the U.S., grew 3%; and our international business was up 9%, led by an acceleration in Asia. And we continue to see robust performance in our core as well as outsized growth in our key focus areas like women's and tops. The results we've delivered this quarter against an increasingly complex backdrop are yet another proof point that our strategies are working.

Looking ahead, there are several factors that give me even more conviction that our momentum will continue. First, our narrowed focus enables us to maximize the full potential of the Levi's brand. We will continue to build momentum through impactful marketing campaigns, strategic partnerships and innovative collaborations ensuring that the brand remains firmly at the center of culture.

Second, the total addressable market for denim is large and growing as consumer preferences continue to shift towards casualization. As a definitive market leader, we are well positioned to take advantage and drive growth.

Third, our denim leadership puts us in a prime position to define and own head-to-toe denim lifestyle, further expanding our addressable market. As we drive this momentum forward, we'll continue to deliver an innovative and robust product pipeline across genders and categories.

Fourth, our DTC-first strategy is bringing us closer to the consumer and generating consistent and significant growth, while we have also stabilized and grown our wholesale business. Both channels are seeing strong improvements in profitability.

Fifth, while international already comprises nearly 60% of our total business, there are still untapped opportunities for us to grow, particularly in Asia, where our business has momentum and the opportunity for continued expansion is considerable. Underpinning all of this is our culture of performance with a sharpened focus on operating with rigor and executing with excellence, from go-to-market efficiencies and more productive store operations to end-to-end supply chain improvements.

I will now turn to highlights from the third quarter in the context of our strategies. All numbers that Harmit and I will reference are on an organic continuing operations basis. Let's start with our first strategy, being brand-led. Levi's had another strong quarter of growth. In the quarter, we launched the final chapter of the REIIMAGINE campaign with Beyonce. This campaign delivered as intended, fueling momentum across the business, specifically driving growth in our Levi's women's business up 12% year-to-date.

In August, we debuted our new global campaign starring Shaboozey, underscoring our relevancy and authenticity with men. The campaign showcases our most iconic products, the 501, the trucker jacket and the Western shirt. And we're pleased with how this campaign is being received by our fans.

In addition, we also cultivated enthusiasm for the brand through a broad range of collaborations, including a joint collection with NIKE, using Levi's heritage denim craftsmanship with NIKE's athletic sneaker culture. Our collaborations generate brand heat and introduce Levi to new consumers. And just this week, we launched a special collection with Toy Story in celebration of their 30th anniversary.

Turning to products. Our evolution to a head-to-toe denim lifestyle retailer continues to gain momentum, all while strengthening our position as the global authority in denim. Our Levi's women's business continues to deliver outsized growth, up 9% in Q3, while our leading Levi's men's business grew a solid 5%.

Driven by our diversified Fit portfolio, we saw strong growth in our bottoms business, which was up 6%. We're continuing to inject newness into the looser fit trends with the new baggy utility silhouettes for him and the launch of our Baggy Dad Barrel for her, and we're driving a revival in low rise with our low and super low collection of fits which are delivering strong growth.

As we evolve into denim lifestyle, we're making meaningful progress on our seasonally relevant assortments as consumers look for more buy now, wear now products. Following last year reset, tops continue to drive notable growth, up 9% with strength across women's and Men's.

For the quarter, our shorts business delivered strong growth across genders. We continue to infuse newness into the assortment through fit and fabric innovation from our Linen blend style to the launch of the 501 curve. And with respect to our premiumization efforts, we began to roll out our elevated Blue Tab collection to Europe in early September, following a successful launch in Asia and U.S. earlier this year.

Blue Tab mergers Levi's iconic aesthetics with a refined quality and thoughtful Japanese craftsmanship. Looking to the holiday season, we are well positioned with the right merchandise assortment and the right marketing campaign. We're expanding the range of occasions and amplifying the many ways that fans can embrace our denim lifestyle assortment through elevated fabrics, textures and embellishments. We're excited to showcase Levi through a fresh lens that reflects the season's full spectrum of style.

Now shifting to our strategy to be DTC-first. Global direct-to-consumer sales were up 9%, driven by strong performance in both our stores and online. We generated high single-digit comp growth fueled by higher UPT, AUR and full price selling as our expanded denim lifestyle assortment continues to resonate with our consumers around the world.

And as we continue to grow our DTC channel, we remain focused on doing so profitably with our productivity initiatives resulting in more than 400 basis points of margin expansion in the quarter. We are pleased with the strong results from our store optimization initiatives, which have improved both the consumer experience and store productivity.

We've enhanced our in-store lifestyle merchandising to make the store environment more inspiring and shoppable highlighting our broader assortment of head to toe look. We've also been focused on improving our assortment planning and life cycle management, resulting in lower promotions and higher full-price selling.

Additionally, we're in the process of rolling out a new global selling model for our store team, which, coupled with our enhanced labor scheduling system, is improving the consumer experience and delivering operational efficiencies.

We had another quarter of very strong growth in e-com, up 16%, driven by an increase in traffic across all segments. We expect e-commerce to continue to be our fastest-growing channel on the path to comprising 15% of our total business, up from just 9% today.

In our wholesale channel, net revenues were up 5%, reflecting growth across all segments. In the U.S., the Levi's brands were up 2%, as we continue to invest in top doors and expand and elevate our assortments. Western wear is core to who we are, and we're pleased to have recently expanded our product assortment with Boot Barn and gained new distribution at Cavender's. We also see opportunities to increase our penetration with premium and specialty accounts as we broaden and elevate our lifestyle assortment.

Now turning to our third strategy, powering the portfolio. Our international business grew 9% in Q3. Asia accelerated in the quarter, driven by double-digit growth in key markets like India, Japan, Korea and Turkey. I recently visited several stores across India, Korea and Japan, and it is clear that consumers are responding to the work we've done to ensure the best expression of our denim lifestyle assortment.

Japan, in particular, is a market with a very high bar for denim. We've been investing in Japan over the past decade, transitioning the market from primarily a wholesale business to now close to 75% DTC. Walking our stores in Nagoya, Shinjuku and Harajuku, which are some of our highest volume stores in the world, you'll see the fullest and most premium expression of the Levi's brand. Up almost 50% since 2019 and continuing to gain momentum, we remain optimistic about future opportunities in Japan, and we will replicate our successful playbook in this market across the globe.

Beyond Yoga was up 2% and DTC was up 23%, driven by comps, new doors and e-commerce. Growth in DTC was offset by a decline in wholesale as the team focuses on higher quality sales in the channel. Looking to Q4, we have additional stores opening in Boston, Houston and 2 more stores in Northern California, bringing our total store count to 14. We expect Beyond Yoga to end the year up low teens versus prior year.

In closing, we delivered another standout quarter with sales and earnings growth that positions us to increase our outlook for the year. We are fully prepared and well positioned for holiday, as we enter the season with momentum. Despite an increasingly uncertain external backdrop, we have several tailwinds that give me confidence in not only delivering a strong finish to 2025, but also another strong year in 2026.

Finally, I'd like to thank our incredible talented and passionate team for driving our transformation into the world's denim lifestyle leader and delivering outstanding service to our fans every day.

And with that, I will turn it over to Harmit to provide a financial overview of the quarter and our expectations for the remainder of the year. Harmit?

Thanks, Michelle. In quarter 3, we delivered strong financial results exceeding expectations across sales, gross margin, EBIT margin and EPS. We remain focused on establishing a strong track record of consistent execution and results.

The strategic transformation across our organization has enabled us to evolve into a higher-performing company with stronger revenue growth, expanded margins, improved cash flows and higher returns on invested capital.

Given the outperformance in quarter 3 and continued strong trends, we are also raising our revenue and EPS outlook for the year, despite incorporating higher tariffs than assumed in our previous guidance.

Now turning to our quarter 3 results. Net revenue grew 7%, reflecting the power of our diversified business model. International markets drove approximately 75% of our growth and the U.S. contributed 25%. This international strength reflects our continued expansion and brand resonance in key markets globally, while our U.S. business maintained solid underlying momentum.

By channel, growth was evenly balanced between wholesale and direct-to-consumer each growing and contributing roughly 50% of our revenue increase. This balanced performance underscores the success of our DTC-first strategy, while maintaining strong partnerships in wholesale.

By gender, women's contributed approximately 40% of our growth with men's accounting for the balance. We continued to execute against our strategy to capture greater share in our underpenetrated higher gross margin women's segment, while a large men's business continues to generate solid growth, as we fuel momentum in the category.

Turning to gross margin performance. We delivered another strong quarter with a quarter 3 record gross margin of 61.7% of net revenues, expanding 110 basis points versus the prior year, more than offsetting 80 basis points of tariff headwinds.

Three key drivers fuel the continued expansion. First, our structural business mix continues to evolve favorably with the accelerating shift towards higher-margin DTC, international and women's category.

Second, targeted pricing actions we have taken across our assortment as well as higher full-price selling and reduced promotion levels in our direct-to-consumer channel as consumers continue to gravitate towards newness.

Third, approximately 50 basis points of the upside in gross margin was driven by foreign exchange. While we are judicially approaching pricing opportunities across our business, in quarter 3, we saw a significant increase in units, demonstrating healthy underlying demand for our brands.

I'm pleased to report that our adjusted SG&A performance came in line with our expectations, representing less than 50% of total revenue, over 150 basis points improvement from our first half run rate. The primary factors contributing to the increase in SG&A dollars includes higher performance-based compensation given the momentum in our business, costs associated with our store opening as well as expenses associated with the transformation of our distribution network.

The combination of robust gross margin and our disciplined approach to SG&A management delivered an adjusted EBIT margin of 11.8% and generated $0.34 of adjusted diluted EPS, both ahead of our expectations. Our focus on profitability as we accelerate growth has enabled us to grow both adjusted EBIT and adjusted diluted EPS, up approximately 25% to prior year on a year-to-date basis.

Now let's review the key highlights by segment. The Americas net revenues were up 7%. Our U.S. business was up 3%, delivering our fifth consecutive quarter of strong growth. DTC grew 6% and now represents over 40% of the U.S. market. U.S. wholesale net revenues were also up despite the challenges posed by the transition of our U.S. distribution centers.

Driven by broad-based strength across the region, LatAm has seen several consecutive quarters of double-digit growth, including Q3, which was up 23%. Americas operating margin expanded 50 basis points, driven by gross margin and revenue leverage. Europe's net revenues were up 3%. All key markets delivered growth, led by a very strong performance in the U.K.

While weather impacted footfall in June and July, we exited the quarter with strong performance in August, and we continue to expect mid-single-digit growth in Europe for the year. Operating margin grew 80 basis points versus the prior year from strong gross margin expansion.

Asia's net revenues accelerated to up 12%. The segment saw double-digit growth in both DTC and wholesale. Operating margin increased 50 basis points to prior year. Asia is up 8% on a year-to-date basis, and operating margin for the year is up 40 basis points to prior year.

Turning to our shareholder returns program and the balance sheet. In the quarter, we returned $151 million to shareholders, a 118% increase versus last year. We've also closed the first phase of the Dockers sales. And with the proceeds, we have implemented $120 million accelerated share repurchase program and retired approximately 5 million shares with the remaining shares to be settled by the first quarter of 2026.

We have returned $283 million to shareholders year-to-date, which is substantially higher than our annual cash payout target. And for Q4, we declared a dividend of $0.14 per share, which is up 8% to prior year. We ended the quarter with reported inventory dollars up 12%, driven by purposeful investments ahead of the holiday and higher product costs than a year ago due to tariffs.

In unit terms, inventory was up 8% versus last year. As of today, we have 70% of the product in the U.S. needed for holiday.

Before turning to guidance, let me briefly share our updated assumptions around tariffs. Our updated guidance reflects the latest tariff rates, which include 30% for China and an increase to approximately 20% for the rest of the world. This is higher than our last assumption. And as a result, we estimate the full year gross impact of tariffs before mitigation to be approximately a 70 basis point headwind to gross margin compared to 50 basis points previously.

However, given the Q3 results and after mitigation, we continue to expect only a 20 basis point impact to gross margin. This translates to a $0.02 to $0.03 impact to adjusted diluted EPS, unchanged from last quarter's guidance. As respect to quarter 4, this equates to an 80 basis point headwind to gross margin and a $0.03 impact to adjusted diluted EPS.

Looking to 2026, we are continuing to take actions to offset the impact of tariffs. As a reminder, these mitigation initiatives include promotion optimization, targeted pricing actions, vendor negotiation and further supply chain diversification.

Now I will turn to our outlook for quarter 4 and then cover the full year. While we are taking a prudent approach to our outlook given the complex macro environment and the absence of the 53rd week, which contributed 4 points to the top line in quarter 4 of 2024, we remain confident in the underlying strength and momentum of our business.

In quarter 4, we expect organic net revenue growth to be up approximately 1% and on a 2-year stack, this equates to 9% organic growth. Reported net revenues are expected to be down approximately 3% because of noncomparable items, including the 53rd week, Denizen and footwear, which are no longer included in the revenue base.

Gross margin is expected to contract approximately 100 basis points in quarter 4, driven by tariffs as well as the impact of the 53rd week, and we expect adjusted EBIT margin to be in the range of 12.4% to 12.6%. We expect the tax rate to be in the low 20s, higher than a year ago and adjusted diluted EPS to be in the range of $0.36 to $0.38.

For the full year, we are taking our revenues up by approximately 1 percentage point and EPS by $0.02. We now expect reported net revenue growth of approximately 3% for the year, and we have increased our expectations for organic net revenues to approximately 6% up from prior year.

We now expect gross margin to expand 100 basis points for the full year, up from the 80 basis points stated in our prior guidance, including the incremental drag from tariffs. We continue to expect adjusted SG&A as a percentage of revenue to end the year at around 50%. And adjusted EBIT margin to be in the range of 11.4% to 11.6%.

As we have previously shared, we continue to expect the tax rate to be about 23%. And we are raising our full year adjusted diluted EPS range by $0.02 to $1.27 to $1.32 for the full year.

In closing, our 4 consecutive quarters of high single-digit growth and raised revenue expectations underscore the strength and resilience of our business. As we accelerate profitable growth, we are transforming into a best-in-class DTC-first denim lifestyle retailer, unlocking new opportunities and delivering greater value for our shareholders.

Our disciplined execution and agility have enabled us to deliver 14 consecutive quarters of DTC comp sales, expand margins, drive cash flow and return significant capital to our shareholders, including the recent ASR and our growing dividend.

With our strategic focus on high-growth segments, tops, women's, international and DTC, we see a long runway of profitable growth ahead.

Thank you for your continued trust and support. We are more confident than ever in our future. I will now open up the line for Q&A.

[Operator Instructions] Our first question comes from the line of Laurent Vasilescu of BNP Paribas.

I wanted to ask about your European momentum. We had a major U.S. brand caution about the European marketplace the other week then around increased promotionality. Curious to hear what you're seeing in this important marketplace? How do you -- how are your European prebooks look for next spring?

And then Harmit, just on the 4Q guide, the gross margin down 100 basis points. Can you maybe just unpack that a little bit more, what's the 53rd week impact on the GM? And what are the positive offsets?

Sure. Laurent, thanks for calling in. So Europe was up 3% for the quarter. You heard in my prepared remarks about the weather impact. But as soon as the weather cooled, we saw Europe accelerate to double-digit growth, especially as we exited the quarter.

There was some shifting in July and August, but September remains strong. We have seen growth in the quarter across both channels. DTC was up 4%, wholesale was up 2%. Some key markets really performed. U.K. was up high mid-teen and high single-digit growth in Germany and Italy.

If you think across men and women, women continues to be strong in Europe. And the consumer is gravitating towards a broader assortment, looser fits, tops, which is our fastest-growing category. So our view is, unlike the other major brands that you mentioned, we expect to end the year up mid-single digit. And this has accelerated substantially relative to a year ago. September is off to a good start.

Our prebook for spring is up mid-single digits. Having said all that, our operating margins were also up 80 basis points. So I think that's our perspective of Europe. A big shout-out to the team on the ground that is working its way through it.

On your question, I can broadly talk Q4 guidance and then I'll talk gross margins in a minute. But on Q4, we expect the momentum of our business to continue, and our view is that fundamentally, the underlying trends remain strong. Our Q4 guidance overall is impacted by 3 things: The year we're lapping, which includes a 53rd week, which helped Q4 last year by 4 points in revenue and 20 basis points in gross margin.

We do have an incremental headwind on tariff. It's impacting gross margin first, unmitigated by 130 basis points and mitigated by about 50 basis -- sorry, by 80 basis points and EPS by $0.03. Had it not been for tariffs, our gross margins in quarter 4 would have been up. I mean, it's pretty

And then we're just taking a conservative approach to the quarter given the complex macros, there's tariffs and maybe potential impact on demand. We are not seeing it as we closed out September and the continued transformation of our distribution center. The way to think about it, folks is our -- we're replacing our full year top line guidance to 6% organic. And if you think of the last 3 years, '23 organic growth was flat, '24 was about close to 3% and this year, 6%.

So as I said in the prepared remarks, we're solidly on track to be a mid-single-digit growth company. And EBIT margin should end the year in the mid 11% in 2023 or close to 9%. So we've steadily improved that higher gross margin efforts on SG&A and flow-through onto EBIT margin.

That's great to hear. Best luck with the holiday season. .

Thanks, Laurent.

Thank you.

Our next question comes from the line of Matthew Boss from JPMorgan.

So Michelle, could you elaborate on the momentum that you cited entering the season? Maybe what are you seeing in the denim category or from the consumer broadly?

And then Harmit, so have you seen any material change in demand trends in September or October globally? Or is it just prudent planning for the remainder of the quarter that's driving the moderation that's embedded in your fourth quarter organic revenue guidance?

I'll answer your second first because I'm sure it's top of mind for folks. No, it's just being -- the prudent guidance is just being conservatism on the macros. We are not seeing any underlying change in trends, as I reflected. I think we're really well set for holidays, and Michelle can give you a perspective on the category and the consumer.

Sure. So Matt, thanks for the question. First, let me talk about the category. We're really excited. I mean the denim category is accelerating both here in the U.S. and globally. And as the definitive market leader, we are very well positioned to take advantage of that.

And of course, as the leader, we help fuel the growth, and we're seeing that happen. Just to remind everyone, we are the market share leader across men's and women's globally and we continue to maintain our #1 share position in the U.S. as well as for both men and women. I'd say most recently, we're really thrilled to see that we're gaining share in used, premium and with our signature business. So when we think about our business from a segmentation standpoint, doing really well with Red Tab.

And for those consumers who are more value-oriented, we saw our signature business up double digits this quarter. What's driving that for our business in terms of market share gains and again, as the leader, helping to fuel the momentum in the category overall, I mean it starts with product.

We're bringing a lot of newness and innovation into our business through fits, fabrics, silhouettes, a lot of that's still happening with Baggy, but we're really seeing strength across the board. And importantly, not only is it continuing to be the leader in denim bottoms, but we're really expanding our addressable market as we think about going from denim bottoms to head-to-toe denim lifestyle. And we're seeing that momentum in categories like tops.

So when you take a step back, I mean, historically, we've been around many decades. We really built this business on denim, but we're building our future on denim lifestyle. So we feel good about the category, our position.

Now more broadly, to your question on the consumer I think kind of building on Harmit's comments and mine, our consumer continues to be resilient, and we're seeing that around the globe. I mean it starts with the business, our fourth consecutive quarter of high single-digit organic growth globally. And I think it's important to make note that this -- for the quarter, this business was driven largely through unit growth, right?

So it's unit growth that's really fueling that momentum. And we saw broad-based strength across geographies, across categories at both men's and women's, tops and bottoms and both DTC and wholesale. So consumers responding. Our strategies are working I mentioned the denim category accelerating, I mentioned really kind of being relevant across these various consumer cohorts and we guess that we're operating in a complex environment here in the U.S. we're staying close to it.

But when you think about the Levi's brand in times of uncertainty, consumers turns to brands that they know and trust and Levi's is certainly one of those brands. So we're optimistic as we enter the fourth quarter, we expect the health and the momentum of our business to continue. We've been planning for holiday all year, and I would say we have our most robust lifestyle assortment we've ever brought to the consumer.

We've lost a seasonally relevant product across really all categories. And again, we continue to make progress on the head to toe, so you'll see lots of the fashion bottoms as well as tops and outerwear third pieces. And I think products that really go sort of from day to night at work to evening events, especially during the holiday season, but there's a lot of newness and that will also be fueled by tremendous marketing.

We've had a great year of marketing with Beyonce, we've got Shaboozey right now, and you can expect us to continue to connect in a relevant way during the holiday season.

Our next question comes from the line of Ike Boruchow of Wells Fargo.

Let me add my congratulations. Maybe Harmit, just to focus on margins specifically. Can you comment on 2 things: one, within the SG&A cost line, you talked a little bit about it earlier, but the distribution line is running around 7% of sales right now. I know can you remind us the moving pieces on the warehousing and DCs you have going on? A year ago, it was around. I think historically, it's been 5%.

How quickly does that margin start to benefit you guys as you go into next year? And then to that point, are you comfortable beginning to lay out a time line on the return to 15% margin you guys kind of put back on the table several quarters ago as the momentum picked up?

So let me, Ike, I'll start with gross margin, I'll give you some color about what happened in Q3, so people and yourself understand, then I'll go quickly into SG&A and distribution.

So think of gross margin in quarter 3, up 110 basis points higher than what we had expected when we talked about this a quarter ago, 3 basic factors One is the structural mix, which is higher women's DTC and international that we think continues for a long, long time.

The second is we have taken moderate pricing, and we're driving higher full-price sales. And the third is the FX benefit, which we had called out about 50 basis points. This more than offset about 80 basis points of headwind from the tariffs. And so that's why, a, we were ahead of last year. And over delivery was FX and difficult to predict. We haven't predicted FX for quarter 4 as an example.

And full price is something we're focused on. It's difficult to forecast that. So those -- that gross margin. Then you think about SG&A. Our SG&A for the quarter was below 50%. If you think the first half of the year, it was higher than 50% of revenue higher than -- so the run rate was lower than the first half of the year, which was higher.

The way we think of SG&A, I mean, there are 2 ways to look at it: a, gross profit dollars growing at a faster pace than SG&A so if you thin of year-to-date, our gross profit dollars are up $220 million and SG&A is up $126 million, so clearly driving high flow-through.

If you look at it just as a revenue to SG&A, SG&A up 6% and revenue up 8%, so clear leverage. As we think we end the year, if 6% is the revenue guidance organically, SG&A is probably in the mid-single digits, so there's clear leverage on that.

And this quarter, our SG&A being up relative to a year ago. There's performance comp, which is a big piece. We're having a good year. Distribution costs, which I'll come to in a minute, so I'll answer your question. We opened on a gross basis, 40 new stores. I mean -- and that's really the trifecta factor in DTC is driving the results. Market expenses -- marketing expenses moved a little between Q4 and Q3, especially as we launched the Shaboozey campaign and some foreign exchange headwinds.

To your question, Ike, about distribution, Overall, as you know, we're remapping our distribution network to more of a hybrid network built for omnichannel from a manual network that is built for wholesale. So there are clear benefits that we will see over time. In the short term and transformation obviously have a short-term impact, over the short term, we -- in the U.S., we've been running panel DCs as we ramp up the new DC that's run by a third party.

So if you think of distribution costs about 7% and they've increased from a year ago, I would say about half of that is a reclass in distribution expenses from selling to distribution for e-commerce. And the other half is equally split between volume, which is driving more distribution expenses and the cost of parallel running. Our expectation is that parallel running of DCs because the good news is our demand is pretty robust. So as we make this transformation, we have to do in a way that we not only fulfill the demand for our customers and the consumers but also ramp up and close this DC.

So our view is -- and it's our art and science, so we're working through that. But I think by the end of quarter 1, '26 is when we probably ramp down the parallel running of the DC, so early '26. And when we report results for quarter 4 in early 2026. We'll give you a perspective undistributed expenses. But over time, long term, we should reduce cost per unit and the cost of running parallel DCs. Does that help, Ike, answer your question?

Yes. And I'm just curious, time line on the 15%, is there anything you can share?

I think you're asking for a quick preview to Investor Day or a preview on that. But I think the way to think about that, Ike, is our EBIT margin should end the year about in the mid-11s, right? And they've grown nicely over the last couple of years. I think the basic building blocks are the following: the gross margin expansion continues. I mean, our view is that the structural fee continues say -- and if you take probably a 5-year period, you can say that's 200 basis points that should help EBIT.

The SG&A leverage -- as we get to mid-single-digit growth company, I think the SG&A leverage is about 200 basis points. And we may ramp up advertising a little bit given the wonderful programs, our Chief Marketing Officer, and are evoking, I think that helped drive the band, make the brand stronger and importantly, drive revenue. I think that's probably a 50-odd basis points of headwind, and that will come with revenue. So I think that's your building block. So you think of gross margin expansion, SG&A leverage and a little bit of reinvestment in EBITDA can get to the 15%.

Our next question comes from the line of Paul of Barclays.

Within the wholesale business growth, can you speak to how much was driven by maybe new points of distribution or expanded assortment versus like-for-like on stronger sell-throughs? And how would you categorize inventory levels within the retail channel

Sure, Paul. Thanks for the question. So as we said in our earlier remarks, we're quite pleased with the continued growth that we're seeing in the channel. This is now 4 consecutive quarters with 4% or 5%. We do expect the year to be slightly positive in the wholesale channel for the entire year, which was actually up from our prior expectation, which we had said previously flat to slightly up.

We saw positive growth in this channel across all segments. We saw particular strength in U.S. wholesale. We saw it in Asia, Latin America, and in the Signature business, which is more for that value consumer. The growth is largely being driven with existing accounts as their consumers are responding to our fashion fits. Women's, women's especially is outperforming and lifestyle.

So while we -- yes, we are bringing in some new accounts like Western ware, we got new distribution in we're expanding in Boot Barn. The growth is largely coming from our execution with our existing partners.

Our next question comes from the line of Oliver Chen of TD Securities.

Regarding Americas, the the low single-digit growth, is your expectation that, that continues in Q4? And on the wholesale side, it's been a little more challenging channel, but do you think it will remain sustainably positive or will that be potentially volatile?

Second, there's a lot of great initiatives and partnerships, but part of the thesis is also like amplified to simplify with inventory management and SKU rationalization. So how do we reconcile those 2 in terms of where you are in that journey?

Sure. Thanks, Oliver, for the question. As it relates to the Americas or I can speak to the biggest part of the business, which is the U.S., we're really proud about how the team has been executing in that market. This is our fifth consecutive quarter of growth and because you all know, it's our largest, most mature, most competitive market.

And both channels, DTC was up 6%, wholesale up 2% and we continue to see long-term growth opportunities in both those channels. So as I think about the DTC business here in the U.S., we have the potential to even double our store count and further accelerate e-commerce on the back of the momentum we have.

And on wholesale, which I was just talking about more broadly, global wholesale, but wholesale in the U.S. remains strong. And our key partners are responding and their consumers are responding to our expanded product pipeline across men's, especially women's where we continue to be under-indexed in particular, in the wholesale channel and then that head-to-toe lifestyle.

As we look forward, I'll just say that we -- as we look to Q4 in the U.S. and in the Americas, we expect the business to remain healthy against executing the same strategies we've been talking about: leaning into DTC, driving units per transaction, driving conversion, driving greater full price sell-through. As I was mentioning earlier, though, a lot of our growth is coming off of units. So while we are seeing that enhanced AUR, we're also driving a lot of volume growth.

And -- but I will say as it relates to U.S. wholesale, while we expect continued positive growth in DTC for -- for the fourth quarter, we do expect U.S. wholesale to be down given that we're lapping a very strong quarter last year, and we had that 53rd week. So as we lap last quarter's fourth quarter strong results, the 53rd week and just frankly, to be continuing to be prudent as we think about this channel given the complex macro environment we're operating in, in the U.S.

So Oliver to does that fully answer -- and then you have part 2 of the question, let me answer that, and then I'll come back to make sure I fully answered. But then part 2, I'm glad you asked the question about rationalization because we continue to make really good progress there. So while we talk about expanded assortment, lifestyle, we are also, at the same time, reducing SKUs, and we've decreased our SKUs by about 15% compared to last year, and this has been an ongoing journey over the last 18 months-or-so.

So we're continuing to raise the bar there. And what's really enabling us to do that is through a tighter globally common or globally directed assortment. So just for perspective, if we think about the season we're in right now, the second half of 2025, 40% of our SKUs are globally common, that's up from a couple of years ago where it was under 10%.

So that allows us to make sure, again, that we can get the breadth and the lifestyle, where we're getting significantly higher productivity per SKU. And that metric just for fun is up 20% on a SKU productivity. So it really speaks to how the team is leaning in with a much stronger merchant mentality and operating like a retailer and that's helping us drive those tailwinds that we're seeing in the business overall and especially in DTC.

Yes. Michelle, that's really helpful. This is quick. I think, Harmit, are there any gross margin comparisons we should be aware of as we anniversary the this year and think about next year?

So last year was 53rd week. This year, I think the only piece will be, we probably see tariff impact in the second half of this year, next year in the first half. The way we think about gross margin and I think you're asking for a high-level framework for '26. And it's a good question.

Let me just talk about it because as we build our plans for next year, the tailwinds that we think probably helped gross margin accretion. One is we're looking at pricing opportunities, again, targeted not only in the U.S. but globally, given that 60% of the business is global is outside the U.S., structural improvements of DTC international women continues.

We continue to focus on full-price selling, and it's not anywhere close to 100%, so there's clearly opportunity there. The other piece is as we think about product costs, Michelle talked about the simplification of SKUs, we're looking at a shorter go-to-market calendar and cotton commodity is in a better spot today than it was a year ago. We've broadly locked in product costing for the first half. We're in the process -- by the time we report and guide Q '26, we'll probably have locked in the second half, so stay tuned.

And the headwind is largely tariffs. And so you've seen some impact in the second half of this year. We have offset the first -- the quarter 3, we're working to try and do what we can for quarter 4, but I've guided you the appropriate numbers. And so those are the tailwinds and the headwinds as you think about gross margin.

Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

As you think about the lifestyle offering, Michelle, with tops and with bottoms and jackets outfits, what did you see in the growth rates of the different categories and given the marketing that you've been doing in the collaborations, how do you think of the AUR opportunities going forward?

Great. Thanks, Dana, for the question. We're really pleased with the progress and the acceleration in our tops business overall. And I'd like to say, while we're pleased, we're not satisfied. And there's a ton of upside because tops represents just currently 22% of our business.

But as we shared earlier, our tops grew 9% overall for the quarter, 10% year-to-date, and we're really seeing the strength across channels and genders. So if you double-click underneath that, men's up 10%, and we're really seeing popularity in things like Western tops, button downs, polos, wovens.

As we think about our top strategy and denim lifestyle, we do start closer to our core. So really injecting light into like the Western shirt, which is being advertised in our campaign right now with Shaboozey. But woven, so wovens things like our authentic button down, that business remains up 20%.

Similarly, women's tops up 8%, seeing it across both channels. Denim tops, I'll start there, at 12%; wovens, including things like gloves, fashion button down, up 37%. And then the category, we're really expanding in to expand her closet, dresses and jumpsuits, up nearly 20%. I think importantly, as we drive all this newness and excitement, in head-to-toe dressing, we're seeing both growth in newness and in our core, which is really important to continue to support both.

Kind of back to the opportunity that if you think about our business today, again, while we're making progress, there's so much upside. Our ratio of bottoms to tops is 3:1. Now that's up significantly from years ago where it was 7:1 or 5:1. But our goal is to get to 1:1.

And I'm very confident we will. And as we drive tops, it's a UPT driver, it can be a traffic driver and it really kind of completes this mission we're on to have Levi stand for head-to-toe denim lifestyle. So hopefully, that addresses your question, Dana?

Yes.

Okay. Thanks.

Our next question comes from the line of [ Aditya Kulkarni ] of UBS.

I think this is Jay Sole, and hopefully, you can hear me. But my question is that it sounds like you took some pricing in Q3, Harmit, I think you said one of the gross margin drivers through was pricing. Was that in response to tariffs? In Q4 -- sorry, before that, the consumer it sounds like responded well to those price increases. Did you see any resistance? And then Q4, do you plan accelerating the price increases and therefore, do you expect the consumer to react differently if you increase prices in the fourth quarter?

So Jay, we did. We took a little bit of pricing in Q3. It was not an MSRP because the goods have already been ticketed. This was in the sell-in to our customers in the U.S., I'm talking about. And we do it thoughtfully. We have really great momentum, as we mentioned, driven by the demand. .

But to answer your question, no impact on demand. We're not seeing any impact on demand either from the customer or the consumer. The other piece that's really working for us is our new products because -- and so as we think longer term pricing through innovation, is one lever. We are also taking a hard look at our promotions and minimizing this as we focus on higher full price selling will also be something that probably continues into '26.

So the way we were thinking about pricing, it's more important to think about what's the price value equation for our products relative to the marketplace, and that's an important consideration set. The other piece that's important, Jay, is the segmentation of our products. So if you think of the value consumer in the U.S., we offer signature product. It's a great price point, it's offered through Walmart and it had a great cost is up double digits.

We've just also introduced Blue Tab, which is our premium product is premium position. It's 1.5x to 2x the price of Red Tab product and offers real value even when you benchmark that. It's a limited offer. We hope to scale it, it's doing really well. So that's how one is thinking through it. And there's a little bit of pricing in other parts of the world, but it's not something that we've done globally. So when we talk about '26 and '26 will give you a perspective on the pricing actions we have taken or our teams have taken around the world.

Our next question comes from the line of Paul Lejuez of Citi.

This is Tracy Kogan filling in for Paul. I just had a follow-up on the last question. I think you said, from what I understood, that you only raised prices on sell-in to your partners. So have you actually had time to see the consumer response to these higher prices or are you only saying that your partners haven't had any hesitancy to buy at these higher prices? And then just more broadly, I was hoping you could comment on the U.S. wholesale business, how sell-ins are comparing to sellouts?

Generally, Tracy -- good question. I think it's a combination of both because pricing initiatives have been now there through the quarter. The customers are not -- we're not seeing any demand contraction given the marginal pricing that has been taken or a consumer reaction.

The consumer is generally resilient so far. And that's how we're approaching the pricing, plus the full-price selling has been there for a while. And given that the product is very relevant and hitting the mark, we're not seeing any consumer pullback. I think that was your first question. What was the second one, Tracy, again?

I was hoping you could just comment more broadly on how the sell-in to your wholesale partners are comparing to the sell-out. Are they being more cautious than maybe the end consumer might indicate or something like that?

So set troughs have been fairly consistent with the sell-in. And that's why we are optimistic about ending the year strongly and then maintaining the momentum as we begin '26.

At this time, I'd like to turn the floor back over to Michelle Gass for any closing remarks. Madam?

Yes. Thank you, everyone, for joining the call, and we will look forward to talking to you at the end of Q4.

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

Good afternoon, and welcome to this next session of the GS Retailing Conference. My name is Brooke Roche and I cover the apparel boot and potline sector here at GS. And I'm thrilled to introduce our next session for the Levi Strauss. Here with me on stage returning for the first time since 2019 is Harmit Singh, CFO and Chief Growth Officer. Welcome, Harmit.

Thanks for having us, Brooke. Good to be here.

Very excited to have your return.

Yes, good to be here.

Harmit ,you've implemented several strategic changes to the business over the last few years. What do you think have driven the most momentum so far? And what do you expect will be the most important driver as you look ahead into 2026?

Straight to the most pointed question, but let me start with the comment. We are in a quiet period. So I'm not going to talk about financial performance, outlook, current trends. I'll go back to what we reported in our earnings, I think, in the middle of July. We're about a month away. October is when we report our quarter 3. And so we'll talk about performance and trends there.

To your question, I think, overall, I'm really pleased with the progress on the transformation of the company that's been happening over the last 18 months. We are fundamentally moving to a very different company, higher growth, higher margin profile, stronger cash flows, higher return on invested capital and higher direct-to-consumer. I think as we think about the company, the vision -- strategic vision of the company is to become a company with $10 billion in revenue and operating margins of 15%.

And our core strategies that we're executing that led to high single-digit growth now for the last 3 quarters, higher than and faster than the category is really driven by being more brand-led, this pivot to DTC first, not DTC only, it's DTC first. Wholesale is a very important part of the business model and powering the portfolio, which is about growing international as well as we have a second brand called Beyond Yoga.

Now what's really happening in terms of the transformation. First, we've narrowed our focus. We have exited Denizen. We've exited a small footwear business. And we've just exited Dockers largely in the U.S. and Canada, and we exit Dockers by the end of January 2026, largely low-margin, low profitable businesses so that we can focus on Levi's and accelerate Beyond Yoga. So that's the first piece.

The second piece is about changing the ways we work. As a wholesaler, our go-to-market calendar was 16 months. We're trying to bring it down to about 12 to 13 months. I mean if you're really going to grow our tops business, and continue to accelerate our DTC business, the go-to-market calendar has to be shorter. We're eliminating SKUs, unproductive SKUs. I think we eliminated about 15% as we make way for the new SKUs. And so that's the second piece of it.

The third is productivity -- driving productivity on DTC. I mean there is a myth which says that if you grow your DTC business, it will dilute your operating margins. We are actually changing that. Our operating margins over the last 3 years have actually grown as has our direct-to-consumer business. So our direct-to-consumer business was 40%, I think 2 or 3 years ago, it's 50% this year, and operating margins are up 2, 2.5 points. And so that's -- and we're driving that productivity largely through revenue versus cost. It's higher revenue per square foot. So that's the third piece of it.

And I think the fourth piece of the transition is about becoming more of a denim lifestyle player. It's not about live stuff for the sake of lifestyle. It's about what we really did was we added it to amplify. We said we'll narrow focus on denim. We are known for denim bottoms. Let's be known for denim shirts, let's be known -- I'm wearing the Western way. We've just launched a new Western bottom in Cavender and Boot Barn as we penetrate the quiet Western trend that we are seeing. And so that will really drive the future growth of the company. And so I think a great foundation for '26 because we will have a great year this year, and then we'll take it to the next level in the next few years.

Great. You mentioned denim several times in your introductory comment, which makes sense given the company. But it seems to have -- denim seems to be happening quite a moment right now. And I guess one of the questions we get most regularly is how much of a tailwind Levi is getting from the denim cycle versus what's happening within your own company? How long do you think that the denim-silhouette trend shift can last? And how are you thinking about price versus units?

Yes. That's a lot of interesting questions. First, the denim category is a large cart. I think it's about $100 billion globally and is expected to grow in the mid-single-digit range. And so we start with that. What is actually driving this and the denim cycle that you talked about? I think a couple of things.

First, the overall umbrella is world is becoming a lot more casual, right? And denim is a key driver of that casualization phase. So that's the first piece. The second is you talked about silhouette, and I just want to clarify the myth that it's not only silhouettes, there are a couple of other things that are happening.

Yes, the looser baggier fit is in vogue. I think if you think of our assortment base, it's about 15% of our assortment base. It started with her and men are not quickly gravitating to it. So that's that piece. But it's not 80% of our business, it's only 15%.

The slim and the skinnier fit is still about 20% of our business and growing. I mean when I joined the company in '13 and I think '14, I was asked is skinny there. I was asked the same question about a year ago. And no, it's here. We've got the silhouette for people who like the skinny slimmer fit. So that's the second piece.

The third is this quiet Western trend that's emerging. It's a subtle western trend. So I'm wearing the Western shirt as an example. We just signed up Shaboozey to help us grow the Western look for men. And so there's that piece of it.

And then as a company, because we are really focusing on denim lifestyle, as the world becomes casual, we are growing our non-denim business. And non-denim, again, a less known fact about us, non-denim is about 40% of our business and growing. And the way we're growing it is we launched the performance tech, which is more in the performance wear category. That's doing really well. Chinos is a big piece of our business and growing.

And the other way we're expanding our addressable market is we're getting into denims skirts, denim dresses, denim jump suits, which we never played in. So if you want to own denim really the head-to-toe look should be denim. The other piece that is helping us as against others, I'm going something called Blue Tab. It's the premium offer. It's basically very successful in Asia. It really started and was inspired by Japanese denim, which is a premium denim fabric.

And Selvedge and that's what we're taking around the world. We introduced in the U.S., done really well. We'll bring it back in a bigger scale, and we're taking it to Europe. So I think as you think about the brand, it's premiumizing is different trends. It's not one trend, the different trends that are helping the category. And as leader, if we grow the category growth.

You started the conversation with the DTC first strategy. And DTC is now over 50% total sales. You've had a lot of quarters of sequential comp momentum. What gives you confidence that you can continue to comp the comp? And how are you thinking about DTC first across your outlet versus your full price business?

Yes, sure. So it was about DTC first because we think we can lead with DTC and wholesale is a great complement to the -- to what's happening on our direct-to-consumer business. For clarity, DTC is our stores, mainland and outlet and is our e-commerce business. So we've had 13 consecutive quarters of comp sales. In the last quarter, I think we talked about high single-digit comp sales. The way I think about direct-to-consumer, I like to call it a trifecta, okay, which is you grow your same-store sales, which we have done nicely and successfully grow e-commerce, and I would say in the mid-teens and then open new stores.

We've been -- today, we have about 3,200 stores around the world. We operate and around about 1,200 stores. And our guidance this year talks about 50 to 60 net stores this year. assuming -- and we believe we can open 50, 60 for the next 5 years. So you're talking about adding another 250 stores.

Now why do we believe that we can grow our -- and sustain the growth of our comp stores for a couple of reasons. Number one, we believe we are underpenetrated in women's. If we take our total business, women's is about close to 40%. 75% of the shoppers are actually women. And so what we're doing now with our stores is, a, the assortment is more balanced between men and women. The gross margin in our women's product is higher than men's. It was not true 10 years ago.

The second thing is when you walk into a store, we normally lead with women assortment now versus men. So I think those things are making a difference. For example, in the U.S. in our mainland stores, which is our full price stores, which we've expanded over the last couple of years. We had about 8, 10 -- 5, 7 years ago, we got close to 80. Today, women is approximately 50% of our business and really driving that growth.

And we're doing it growing -- while growing men's at the same time, in a more modest pace, but at least growing men's. So we think we're underpenetrated there that can grow. We think we are underpenetrated in our tops business. Tops is about 50% of our business. And our recent product offers are resonating really well, both with him and her. Tops, for example, in quarter 2 was up 16%. So those are the things that give us confidence to grow our same-store sales.

And if you think of the different metrics as the traditional retailer would, I think we've got growth by converting better. We've got growth through higher traffic and AUR. I think the big opportunity for us is selling more units per transaction, especially as we become more lifestyle. You walk into a Levi store, you walk in for a denim bottom, you like a top, you buy the top. You walk in for it top, you buy a denim bottom. And so that's where the opportunity is. So that's what gives us a little bit of confidence in growing our direct-to-consumer business, which we think can be about 55% to 60% of our total business over the long haul.

Great. Let's shift to wholesale. You've made a lot of transformation of your wholesale business over the last decade. But can you provide an update on what you're seeing in the wholesale environment today across geographies including recent sell-in versus sell-through trends, any notable differences across distribution tiers?

Yes. So wholesale is very important to us. I mean there's no way we can reach all our consumers around the world with our wholesale distribution. We also have great relationships with a lot of wholesale customers. I mean recently -- I mean this morning, Macy's reported, they talked about us. Target reported a few days ago, they talked about us. Boot Barn reported, they talked about Levi's as a brand, et cetera. So I think the relationships are good. The product offers are working.

Wholesale, our view and our growth algorithm assumes wholesale growing a lot more modestly because it's a channel we don't directly control. We upped our guidance for the year for wholesale to flat to slightly positive. We've had a couple of quarters where wholesale has actually grown in the mid-single digit to high single digits. So we had a good run so far.

I think as you think about the profile of the business, the department stores, traditional department stores, which were about 20% of our total business, are down approximately 7%, 8%. So the concentration on department stores is much less. But we have an opportunity with the department stores to grow in areas like women and tops where we are underpenetrated.

And we're working with different wholesale retailers to get a little bit more floor space. It takes a little time and that's where DTC first is important because they see the product working in DTC and then they're buying into the new product. So that's the first piece.

The second is trying to get distribution where we haven't been present. I talked about Cavender that we're just beginning to add our product assortment and it'll take a period of time for that to roll out. Boot Barn, the assortment, we have expanded, especially for her that's going to probably make a difference over time. And that's how we're thinking about wholesale. The growth is really coming from pure play, think Amazon, think Zalando.

We are also trying to control the offer. So in the case of Zalando, we've got our own marketplace as an example and really also focused on growing specialty, which is Urban Outfitters and the like. And I think that's where we're really focused on growing wholesale over time.

Very clear. As we think about your business, you've had a great partnership with Beyoncé this year. One question that we get regularly is how do you cycle that next year when the partnership concludes? How are you thinking about that?

Yes. So the partnership is great. It started with her team calling us saying she's launching this album Cowboy Carter, and she's got a song named after you and will we be okay? We were more than okay. And it's a relationship that we have sustained over the years, starting with when you first started the Destiny Child, part of the Destiny Child band, so it's more organic. We quickly launched a partnership, which was about 4 chapters. Title Reimagine. We took some of the old ads and collaborated on a couple of products. And it's been a home run, as you can see from our results. So I think it's one of the factors where -- which has enabled the momentum that we're seeing in the brand. The way we think about it is how do you take it from where it is today to the next level. And so we have got a couple of things we're working.

We just launched the ad campaign with Shaboozey, again, to grow our men's business and our Western wear. We've got -- we've had a couple of great collaborations. This year, we had the Nike Drop. I am wearing the Nike collaboration. We've had some -- we had the Bob Dylan movie that again resonated and brought the product to life, which is wonderful. As we think about the next year, it's about sustaining this momentum. Next year is about sports. I mean, this year was about music. The music being center for culture continues.

Next year, we've got the Super Bowl at the Levi Stadium. We've got the World Cup at the Levi Stadium. So I think there are definitely a couple of things that we feel over time, we'll continue to maintain the sustained growth that we're seeing, because we'd like to be a single digit -- sorry, a mid-digit growth company, which is about 5%. This year, guidance is in that range. And if you can grow that sustainably over time, you're talking about this getting to the $10 billion path in long term.

Very clear. How would you characterize the health of the Levi consumer today. And one question we're asking all companies at our conference today is whether or not they expect the environment in the second half of '25 to be better, worse or the same relative to recent years?

Yes. No, it's -- I wish I had a crystal ball, could help you with that. But generally, given our results and momentum, we are finding the consumer broadly resilient. I mean, so you think of the Levi's consumer, largely earns $100,000 and over. And that consumer we are seeing generally resilient, number one.

Number two, if you think of the consumer overseas, in Europe, we have seen some great growth. Again, consumer is a lot more resilient than we probably anticipated at the beginning of the year and similar trends in Asia and in Latin America. Now you can't take this for granted. We have to earn the right, and that's what good marketing offers, good product offers help and good partnership with our wholesale customers really brings the product back home.

In the second half, our guidance for the second half is a little bit more modest than the first half. And that takes into account a couple of things. One, there is some pricing taking effect to offset the impact of the tariffs. We don't know how that lands. So we're being a little cautious. We're very confident about our product offers and our marketing. The second is that we're lapping a much stronger second half year ago.

And the third is we're making some changes in part of our transformation and our distribution network. We remapped our distribution network in Europe. We're doing that in the U.S., really building a network that services an omnichannel consumer, especially as we grow across both channels. So those are the reasons.

But to answer your question, I think there are probably going to be winners and losers as the macroeconomics play out. I think we'll be in the winners category because we have the product, we have the people, we have the stores, and we have great marketing. And I think that combination probably helps us.

Have you been experiencing any anti-American sentiment globally? Are there any specific regions to call out? And how are you navigating this environment more broadly?

Yes. No, we haven't experienced any anti-American sentiment. We have been present overseas for the last 80 years. We are a purpose-driven company. So over time, we have developed deep relationships with the local community. And the way to inspire and excite consumers is to give them what they want in terms of product offers and make them feel good wearing our product.

And so we've been very thoughtful. We're being very diligent in making sure that we maintain the relationship as an example. We launched a couple of years ago, our loyalty program. And the loyalty program, we have over 40 million consumers. And we're adding a couple of million a quarter. My own view is for a brand like ours, we should have close to 100 million consumers and I think just keeping the storytelling going and making products relevant is important. And so, so far, no negative anti-American sentiment reflected on the brand.

That's great to hear. Tariffs are the other topic of the year. How are you thinking about the potential magnitude of tariff headwinds at current rates? And what proportion can you mitigate over time? How should we be thinking about the time line to mitigation?

I think -- as I think we said in our quarter 2 earnings a couple of months ago, our assumption at that time was that the impact of tariffs would be an additional 10% on products imported into the U.S. from the rest of the world and about 30% from China. Given the latest round of reciprocal tariffs, that's probably a little higher.

We felt very comfortable mitigating most of the tariff impact and that's where we also raised guidance when we reflected the results. The way I think about it because there's an incremental impact, it's minimal, it's manageable, especially given the brand momentum. It probably -- it's not double what we talked about earlier, largely because the new tariffs went into effect early August and we have a couple of months left in the year.

We're thinking through 2026 thoughtfully because we have a little bit more time to negotiate with our vendors. Given that 2/3 of our growth has been volume driven, we have the volume that we can leverage. So we're working with our vendors. As we simplify SKUs, drive more fabric rationalization, I think those are areas that can continue to improve our cost of goods sold. That will help mitigate tariffs.

We've taken a little bit of pricing in the second half. At the time of announcing earnings, we haven't seen any impact on demand. We'll talk about more about that. We need to report our Q3 earnings in October. So there's a little bit more time to think through that. The way I think about the brand is I think we give good price -- we provide great price value to our consumers.

And as long as we can do that, even in a higher tariff environment, even after taking prices up a little, I think we'll be able to continue to grow market share. It's important to have the right product offers and then prices products effectively. We are thinking through pricing. Everybody is thinking through pricing. For us, it's more targeted pricing. With so much innovation coming, we're thinking our pricing is going to be driven by our new offers as well as we are making a full court press and selling higher full-price sales than we have done in the past.

And so -- and managing the life cycle of our promotions in a better way as we become a DTC-first company. And so those are the things we're thinking through. So that the impact on the consumer from a pricing perspective is as minimal as the environment allows.

Helpful. On inventory, what are your expectations for inventory growth into the back half? And are there any things that we should be aware of? Given the...

So I think quarter 2 inventory is up mid-teens. It was largely -- a large part of the increase was because we brought in product in the second half given the proposed tariff increases. We probably, at that point, had 60% of what we needed for the second half in the U.S.

As we think about the rest of the year, I think -- and the good news is inventory is generally healthy. I think our inventory has never been as healthy, say, over the last couple of years than it is today. So the increase is largely driven by the tariff impact, number one. Number two, with some disruptions in the red -- because of the Red Sea, we've had to increase the cover both here and in Europe. And as long as the business does well and a large part of our inventory -- 2/3 of our inventory is core, think the 501s, think the 511s. And that we can carry from season to season. So even if demand slows down a little, that's something that we can really withstand. So I'd say inventory, we'll project the inventory growth when we give Q3 earnings. But as of Q2, it was about up mid-teens.

Helpful. Your gross margins have reached record levels. If we put all of this together, how should we be thinking about the levers that are most untapped for future expansion into 2026 and beyond?

It's a good -- high gross margin, I think we'll close the year a little over 62%. Three years ago, it was 57%. So we kind of growing gross margins nicely is a good evidence that the brand has momentum, right? So that's a good indicator. I think the factors that have driven higher gross margins. One is the structural shifts in the business, higher DTC is higher gross margin, higher women's is higher gross margin, higher international is higher growth.

So the areas we're really focused on growing our actual gross margin accretive. The other thing is we're making this push into selling higher full-price sale. I mean, that's a metric that I look at closely and working with our commercial people, it's important to make sure that the brands -- the products are relevant. We don't promote and discount or markdown. So that's something that's helping us.

As you think forward, I think the tailwinds on gross margins are largely our growth in women's business, rationalization of SKUs. As we reduce the go-to-market calendar, we are actually ordering product, knowing how the products are working because you're ordering it in the 12-month window. So I think that should help along with helping us drive efficiency on inventory.

So I think those are probably some of the tailwinds, obviously, there's going to be a little bit of pricing. There will be probably some impact of tariff. And so that one mitigate the other. And so I'm confident that we can grow gross margins I think, 30 to 40 basis points a year for a long, long time.

This year, you showed that you could leverage your SG&A, which was a big bear point of the thesis for a while now. Can you help me understand where you see the biggest opportunity to drive additional leverage without compromising your growth initiatives?

Yes. So the SG&A -- the SG&A as a percentage has increased because revenue has kind of been flat or low growth for a while. As revenue picked up, obviously, we're able to leverage SG&A. The other piece that we have spent a lot of time is as we become more of a DTC-first company, taking a hard look at improving our EBIT margins or operating margins in our own stores and in e-commerce. So e-commerce, for example, was losing money.

Today, the e-commerce margin is fully loaded, technology, advertising is actually accretive to the company. And e-commerce has been growing in the mid-single digits. So that's a factor of improvement. As we brought some of the distribution in-house as we become more omnichannel, then you're able to leverage your fixed cost. So that's kind of helped.

And the other thing we were doing structurally on our -- on managing SG&A costs is we've got these global talent hubs we've set up around the world. We've got one in Bangalore, one in Warsaw that we're just setting up and one in Mexico. We're going to try -- and that was largely for finance and tech talent, we were actually -- what we realize is we're getting high talent, the productivity is very high. And so we are actually expanding that across all function. And as we grow the business, we're going to be growing talent in different areas like marketing, merchandising, supply chain, et cetera, in these hubs around the world.

And so that should probably help SG&A -- ensure that the SG&A growth is a lot modest. And those are the factors that hopefully keep SG&A in control. I mean the way we think about it, the growth algorithm is a pretty simple one, grow in the mid-single digit annually, grow -- gross margin 30, 40 basis points. That should grow SG&A in and around the inflation level, slightly better with all the other productivity and structural changes that should drive EBIT margin. And that's where our view is getting to the 15% over time is definitely possible.

It's definitely possible. But is there any color that you can provide on the cadencing or time line that you expect to get to that 15%?

Yes. No. I think we owe everybody mini Investor Day kind of -- and apart how does the $6 billion company become 10% and how does a company that says operating margins in the mid-11s this year get to 15%. The original thought was we do it this year and then the whole tariff thing happens. So we want a little bit more clarity.

Our view is we'll give a time line potentially sometime next year. And internally, because we all compensated, our long-term incentive plans are based on long-term plans that we have aligned with the Board. And our long-term compensation, the metrics, 50% of the compensation is driven by EBIT margin goals and revenue goals and they're long-term in nature. So we have aligned with the Board. And this is a time line on both getting to $10 billion and 15%. We just want dust to settle on the tariffs and then we'll come back and explain it to everybody here on the time line on how to get there.

But I think the overall thing we feel good about is we can continue to grow our women's business, we can continue to grow DTC. International will grow faster than the U.S. And there will be operating margin leverage as the business grows and gross margin grows. And that's really the path to getting to the 15%.

Very clear. Harmit we're about out of time. Are there any closing comments or thoughts that you'd like to share with the audience before we conclude?

No, I'm good. I think the audience has been pretty patiently listening. So -- and I'm sure you guys have had a busy, busy day with this wonderful conference. So thank you for having me. And -- but before I go, I do have to ask a brand question. Just raise your hands, how many Levi's fans in this crowd? Levi's fan. Okay. Good. Anybody seen our Beyond Yoga product? Yes. You got some Beyond Yoga fans. Okay. That's true. A little bit, not as many hands. So hopefully, by the end of the conversation, I've converted a few more to Levi's fans. And we will get a few Beyond Yoga stores here.

Beyond Yoga is a brand that we bought late '21, soon after COVID. We bought a brand that was a little less than $100 million. It's getting closer to $150 million activewear. We've got a few stores open now in Connecticut, 2 there. We just opened a store in Boston. We'll have another store. So we should have over 10, 12 stores a year this year, and it will come to New York City at some stage soon.

Well, thank you, Harmit, and thank you to all of the audience for listening in on the session.

Great. Thank you.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Second Quarter Fiscal 2025 Earnings Conference Call for the period ending June 1, 2025. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet, and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our second quarter fiscal 2025. Joining me on today's call are Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q2 financial results in our earnings release on the 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 you 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 our Form 10-K for the fiscal year ended December 1, 2024, and the MD&A section of our recently filed Form 10-Q 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. These non-GAAP measures are not intended to be a substitute for our GAAP results. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today's press release. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable efforts due to the challenge in quantifying various items, including but not limited to, the effects of foreign currency fluctuations, taxes, any additional U.S. tariffs or responsive non-U.S. tariffs and any future restructuring, restructuring-related severance and other charges.

This call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers, unless otherwise noted, and information provided is based on continuing operations. [Operator Instructions] And now I'd like to turn over the call to Michelle.

Thank you, and welcome, everyone, to today's call. I'm pleased to share that we delivered another standout quarter exceeding expectations across sales, margins and EPS. We saw broad-based revenue growth across channels and categories as well as strong margin expansion driven by the consistent execution of our strategic priorities. We arrived at the midpoint of 2025 in a strong position with the confidence to raise our top and bottom line outlook. Harmit will share more on our guidance later in the call.

In Q2, we delivered another quarter of high single-digit organic net revenue growth, up 9%. Direct-to-consumer was up 10%, reflecting the 13th consecutive quarter of positive comparable sales growth with strong and increasing profitability across channels. Our wholesale business delivered another quarter of growth, up 7%. Our U.S. business maintained solid momentum up 7%, while international was up 10%, driven by outstanding results in Europe. And we continue to see strong performance in our core as well as outsized growth in our key focus areas like women's and tops.

As we reach the midpoint of the year, I'd like to take a step back and reflect on the progress we've made transforming the business over the last 18 months. First, we've made significant strides in accelerating our shift toward becoming a DTC-first business across both brick-and-mortar and e-commerce. Today, our owned and operated channels represent over half of our business, and they continue to deliver consistent, healthy comps alongside improving profitability. This progress reflects our disciplined shift toward becoming a truly consumer-led DTC-first retailer.

Second, we are making measurable progress in our evolution from a denim bottoms business to a full head-to-toe apparel lifestyle brand. While maintaining our dominance in jeans, we continue to drive outsized growth in lifestyle categories, including tops, dresses, outerwear and non-denim bottoms. Importantly, we've expanded our assortment with greater discipline, rationalizing SKUs and introducing newness that is delivering stronger productivity and higher full price sell-through. These choices are key drivers of our sustained market leadership and rising AUR.

Third, we're narrowing our focus. As shared in May, we announced the sale of Dockers, which followed our decision to exit our Denizen and footwear businesses. These bold strategic choices are enabling us to deliberately distort focus to the Levi's brand, putting brand equity, consumer connection and category leadership at the center of every decision.

Fourth, underpinning this transformation is a sharpened ability to operate with rigor and execute with excellence. From go-to-market acceleration and streamlining store operations to end-to-end supply chain efficiencies, we are rewiring how we work, embedding structure, discipline and cross-function alignment at scale. These foundational shifts are unlocking growth, enhancing profitability, enabling us to better serve our fans as we make progress toward becoming a $10 billion company.

While the global operating environment has become more challenging with uncertainty around tariffs and broader consumer behavior, we are navigating this period from a position of strength. I'll now walk you through highlights from the quarter in the context of our strategy. Note that all numbers that Harmit and I will reference are on an organic, continuing operations basis. Let's start with our first strategy, being brand-led.

The Levi's brand continues to resonate with fans around the world, growing 9% overall with 6% growth in men's and 14% in women's. Our unaided brand awareness and consideration remains best-in-class with our scores significantly increasing year-over-year in core markets across the globe. Our position as the most recognizable denim brand in the world is a powerful competitive advantage and a key indicator that our brand is stronger than ever.

We continue to invest in the brand through global marketing initiatives and impactful activation, ensuring the Levi's brand remains at the center of culture. This quarter, we launched the third chapter of our REIIMAGINE campaign with Beyoncé, featuring a recreation of yet another classic marketing spot from our rich archive. We brought this partnership to fans globally through a limited edition product drop. And through our unique House of Strauss network, we worked directly with her team to create custom one-of-a-kind looks for her Cowboy Carter tour.

Being front and center in music culture remains key to our marketing strategy. From the start of the music festival season, we've shown up in a major way from dressing Shaboozey at Stagecoach to hosting an incredible roster of influencers at Coachella. More recently, we were a leading sponsor for Primavera Sound in Barcelona, one of Europe's biggest festivals. With 3 Levi's dedicated stages, we outfitted influential pop icon Troye Sivan and offered an exclusive product collection. And to further drive brand heat, we continue to lean into the power of collaborations this quarter. After teasing at Paris Fashion Week last summer, we launched an Elevated collection with fashion house, sacai, which sold at a premium price point and performed exceptionally well.

Turning to product. Our evolution into a denim lifestyle brand is gaining momentum. We continue to lead the industry and deliver the best fit, fabric and innovation, striking the right balance between our authentic denim roots while infusing newness into the assortment. We're staying true to our denim heritage as we build out a compelling head-to-toe lifestyle assortment, and our amplified focus on women's and denim lifestyle is delivering outsized growth. We remain the unequivocal global leader in jeans. We are driving the trends today while setting the trends for tomorrow.

Our Levi's bottoms business was up 8%, driven by double-digit growth in women's, and men's was up mid-single digits. While traditional fits like slim and straight-like styles remain a closet staple, loose and baggy continue to gain popularity for both women and men. Ahead of the summer, we saw this trend accelerate in our short offering, which grew double digits in both men's and women's. With the '90s and Y2K fashion in full swing, longer and looser style shorts are in high demand. We're confident we have the right newness and innovation like the Baggy Dad Jort in place to deliver for our fans and drive this trend.

Earlier this year and ahead of the warmer months, we introduced an expanded line of lightweight look, including our Linen Plus Denim collection to appeal to our fans' interest in lighter, softer and more comfortable styles. We've infused these new fabric innovations across our assortment from dresses, rompers, jeans and truckers to sweaters, wovens and polos. We've seen strong success across both men and women, and we'll continue to fuel this trend throughout the year as more consumers look for lighterweight offerings year round.

Another notable style trend gaining momentum is what we're calling quiet western, an evolution of the full Western theme we saw take off last year but with a more subtle twist. With our robust denim lifestyle offering, we're seeing consumers find that perfect pairing more and more often. Women are pairing a classic blue cut or flared jean with our simple essential rib tank or one of our textured knits inspired from our heritage. And men are wearing a classic Western shirt with a. Quiet western is perfect for the Levi's denim lifestyle aesthetic and a natural place for us to lead.

Last year, we reset our tops business, and that work is truly taking hold and propelling our evolution into denim lifestyle. This included bringing in new talent, new vendors and new capabilities, including a new top agility function on a shorter go-to-market cycle, which enables a more responsive and on-trend assortment in tops and graphic tees focused on our DTC channels. Energized by this new capability, along with an elevated assortment overall, our tops business grew 16% this quarter with acceleration across genders and channels.

Looking ahead, we have everything in place to continue the momentum we've experienced this year, a fresh lineup of product innovation, unique and exclusive product collaborations and globally relevant partnerships. We have a number of great marketing activities planned for H2, including continuing to fuel our women's business with the launch of an additional chapter of REIIMAGINE, and the introduction of a new campaign focused on underscoring our relevancy and authenticity with men. And you can expect to see the Levi's brand come to life with more exciting and innovative collaborations like our highly anticipated Levi's and NIKE collab, which just dropped.

For products, we're bringing even more fit and fabric innovation to excite our fans in the second half of the year. We're expanding our diversified fit portfolio to drive the loose and baggy trend while also introducing freshness in skinny and straight silhouette. As the quiet Western aesthetic takes hold, we're leaning into bootcut and Western inspired fit to fuel this evolving style. And for our iconic 501, we're launching a breakthrough performance fabric with thermo-regulating technology, bringing year-round comfort denim to a closet staple.

Now shifting to our strategy to be DTC-first. Our global direct-to-consumer performance this quarter was up 10% with another quarter of very solid positive comps. Our strong performance came from increased store traffic, better conversion rates and higher AURs, leading to growth both in stores and online across all geographic segments. As we have shared the past several quarters, we have been focused not only on driving DTC growth but doing it in a healthy and profitable way, and those efforts are paying off as DTC margins continue to improve meaningfully.

We continue to enhance our front-of-house consumer experience and back-of-house efficiency, and we are driving full price sales as consumers gravitate to our new assortment. Our work is not yet done and we see opportunity for continued margin expansion in this channel.

We also continue to expand our global store network, opening 16 net new doors this quarter. Store opening highlights include mainline locations in Nagoya, Japan, Seoul, Korea, and in the U.S. in New Jersey. These stores have been designed and built to better reflect our enhanced denim lifestyle offer. We drove another quarter of double-digit e-commerce growth, up 13% in Q2, with both traffic and AURs increasing as our efforts to elevate and improve the consumer experience on levi.com are gaining traction.

Our loyalty program is another key connection point to our consumers, enabling us to engage more deliberately with our fans. We're increasingly using data and analytics to personalize loyalty member product offerings and experiences. And we're seeing members purchase more frequently and transact at a higher AUR than the balance of our consumer base. With close to 40 million members worldwide, this quarter, we expanded the program across several countries in Europe. And later this month, we're launching enhanced features for loyalty members in the U.S.

Now turning to our third strategy, powering the portfolio. Our international business grew 10% in Q2, led by 15% growth in Europe. Last month, I had the opportunity to visit several of our key cities across Europe, including Paris, Barcelona, and Milan, some of the most fashion-forward cities in the world. I was blown away by how strong and relevant the Levi's brand is in the marketplace, both in stores and with consumers, especially young shoppers. Our team has been hard at work elevating how and where the brand shows up. And I'm constantly impressed by their commitment and dedication, which is another key driver in Europe's overall performance.

We spent time with some of our key franchise partners who share our confidence with our growth prospects and are investing more behind our brands. We also met with key wholesale partners like Zalando and Galeries Lafayette, who are leaning into our broadened assortment and lifestyle, particularly with women. And even though Europe is our second largest geographic segment, we still see a significant growth opportunity ahead.

Beyond Yoga was up 12% in Q2, DTC was up 31% and we're encouraged by the very strong comp performance we are seeing in our stores. In June, we opened our first Beyond Yoga location on the East Coast in Greenwich, Connecticut, which showcases our new elevated format and design concepts and features our most comprehensive assortment spanning women, maternity and men. Our largest Beyond Yoga door to date, this store is already delivering nicely relative to our expectations. And we're on track to open 6 more doors this year, bringing our total store count to 14.

Turning briefly to Dockers. In May, we announced a definitive agreement to sell the brand to Authentic Brands Group. Dockers has been a leader in the global khaki category, and we're confident that Authentic is well positioned to guide the brand's next chapter. I want to take a moment to recognize and thank the Dockers team for their unwavering commitment, creativity and many contributions to LS&Co. over the past several decades. Their work built an enduring brand with a loyal following, and we're proud of all they've accomplished. In addition, I want to express my deep appreciation to the cross-functional teams across LS&Co. who are working tirelessly on this transaction.

In closing, this was another strong quarter across the board, clear evidence that our strategic agenda is gaining traction. We're entering the second half of 2025 from a position of strength with the right initiatives in place to sustain our momentum. Levi's is a brand with 172 years of rich heritage and has remained a global icon. As we look ahead, Levi's has an even bolder future with a bigger legacy and quarter-by-quarter, we're building it. And with that, I will turn it over to Harmit to provide a financial overview of the quarter and our expectations for the year. Harmit?

Thanks, Michelle. We had a strong finish to the first half of '25. In quarter 2, we delivered upside on sales, gross margins, SG&A, EBIT margin and EPS. We saw broad-based strength across DTC and wholesale, international and domestic, women's and men's, tops and bottoms, units and AURs. We were especially pleased to see DTC again lead our growth with comp sales up high single digits. Higher revenue productivity, coupled with better management of costs contributed to DTC EBIT margins increasing approximately 300 basis points in quarter 2 and approximately 400 basis points year-to-date.

In addition, our wholesale channel accelerated to 7%-plus growth, posting its third consecutive quarter of growth while also experiencing improving margins. The continued inflection of our financial performance is a direct result of our laser focus on the core Levi's brand and our DTC-first strategy. We are fundamentally becoming a company with a higher growth rate, higher margin profile, stronger cash flows, higher returns on invested capital and a higher percentage of DTC. We arrive at the midpoint of 2025 in a very strong position with the confidence to raise our full year top and bottom line outlook. I will share more on our guidance for the balance of '25 later in the call.

Now turning to a review of our results. Overall, we saw continued strength across the P&L. Net revenue grew 9%. This was our third consecutive quarter of high single-digit growth. Strength was broad-based as evidenced by the fact that DTC grew 10% and wholesale 7%, e-commerce grew 13% and brick-and-mortar 10%. International grew 10% and the U.S. 7%. Women's grew 13% and men's 6%. Tops grew 15% and bottoms 7%. And importantly, we generated a healthy mix of revenue growth with 2/3 driven by higher volume and 1/3 by higher AURs.

In quarter 2, our global wholesale business again exceeded our expectations. The wholesale channel in Europe returned to growth this quarter as we completed the transition of our new distribution center. Looking forward, our order books remain positive for the balance of the year. In the U.S., Levi's wholesale grew 7%, reflecting continued strength in digital and premium accounts. Our wholesale partners are embracing our head-to-toe offerings, broader product assortment and fashion fits. Having a strong direct-to-consumer presence and focus gives us insights to product trends, enabling both us and our customers to have the confidence to buy and fill flows for our new product offers.

Our 578 Baggy for men is an example of a product that performed exceptionally well in DTC and is now in expansion mode in wholesale for the second half of '25. And we have other new product offerings and expanded assortments, launching with customers in the U.S. this summer and as we head into fall. We're encouraged by our wholesale performance this year as the actions we have taken to stabilize this business are working. And while we continue to take a judicious approach to planning this business, we are raising our full year '25 projection for the wholesale channel to be between flat to now slightly positive.

Gross margin for quarter 2 was a record 62.6% of net revenues, expanding 140 basis points versus last year. This was driven by lower product costs and favorable channel mix. We also continue to benefit from higher full price sales and lower promotion levels as we improve the life cycle management of our products, a key transformation initiative in our pivot to a DTC-first company. Adjusted SG&A expenses in the quarter were 54.4% of total net revenues. There was a 50 basis point rate improvement to prior year, mainly driven by leverage on higher sales.

Distribution expenses increased versus prior year, given the ramp-up of our new DC in Europe and running parallel DCs in the U.S. The incremental distribution expenses associated with the consolidation of our DCs are temporary, and we expect the transition to be complete as we exit the year. We also just completed the sale of our Canton distribution center for which we received $22 million in cash in the quarter. Strategically, the transformation we are making to our DC network enables us to establish a more hybrid footprint, which will improve service levels and optimize distribution costs, supporting our evolution to a DTC-first denim lifestyle leader.

Now back to the numbers. Driven by both gross margin expansion and SG&A leverage, we generated adjusted EBIT margin of 8.3%, up 190 basis points to prior year. Year-to-date, our EBIT margins are up 300 basis points to 10.9%, and the strong EBIT growth was a principal factor in delivering adjusted diluted EPS of $0.22, which was up 37% to prior year.

Now let's review the key highlights by segment. The Americas net revenues were up 9% and the operating margin increased 270 basis points versus the prior year [ to 20.5% ]. We continued to see strong performance across both channels with DTC up 10% and wholesale up 8%. The U.S. business continued its strong performance and grew 7% with both DTC and wholesale up at similar levels. Our full price stores continue to perform exceptionally well with comp sales up high single digits, and as we look forward, we believe we can double our mainland store count over time.

LatAm was up 18%, reflecting broad-based trends across the region, including double-digit growth in Mexico. Europe's net revenues were up 15% in quarter 2 and operating margin for this segment was 17.2%, up 210 basis points to prior year. We saw broad-based strength across markets, including double-digit growth in France, the U.K., Italy, and Spain. Momentum continued in the DTC channel, up 9%, driven by comp sales, reflecting strength across mainline, outlet, and e-commerce. And our wholesale business was up 23%, benefiting from the resumption of normalized shipping at our DC in Germany as well as strong performance from top customers. Year-to-date, our wholesale business in Europe is up 7%, and we continue to expect this channel to be positive for the balance of the year.

Asia net revenues were flat to prior year as we took proactive actions to improve the structural economics of this business, including reducing sales to less profitable partners in India, taking back a portion of our franchisee business in Malaysia, and continuing to rationalize our franchisee base in China. As a result of these onetime actions, operating margins in the quarter contracted 150 basis points. We continue to see solid performance in DTC, which was up double digits. And several markets, including Japan, Turkey and South Africa experienced strong growth. Year-to-date, Asia grew 5% and EBIT margins were up 40 basis points to last year. We expect year-to-date trends to continue, and Asia remains on track to deliver mid-single-digit growth for the year.

Turning to the balance sheet and cash flow. In the quarter, we generated free cash flow of $146 million and delivered a return on invested capital of 18%, up 4 points to prior year. We've also declared an 8% increase in the dividend to $0.14 per share, and we plan to return at least $100 million from net proceeds of the Dockers sale to shareholders in the form of share repurchases. We ended the quarter with reported inventory dollars up 15%. Approximately half the increase is to support sales through holiday, while the balance is mostly attributable to product brought in early to navigate the uncertain tariff impact, the disruption in the resi and our market buybacks in Colombia and Malaysia. We expect to end the year with inventories roughly in line with revenue growth.

Before turning to guidance, let me briefly address the topic of tariffs. After the announcement on April 2, our internal task force has focused on understanding the financial impacts of tariffs. We're also designing and implementing comprehensive actions to mitigate the impact. While the situation is still fluid, our guidance assumes an additional 30% tariff on goods arriving in the U.S. from China and an additional 10% tariff on U.S. imports from the rest of the world. Based on these assumptions, we estimate a gross impact before mitigation of approximately 50 basis points to our gross margin for 2025.

After mitigation, we expect the net impact of tariffs to be about 20 basis points headwind to our full year gross margin or approximately a 40 basis point impact in the second half. This will result in a $0.02 to $0.03 impact to '25 adjusted diluted EPS split evenly between quarter 3 and quarter 4. Our key mitigation initiatives include promotion optimization, targeted pricing actions, vendor negotiations and further supply chain diversification. Looking beyond '25, should tariffs remain in place at these levels, given our transformation initiatives, which provides us multiple levers, we believe we are better positioned than most to manage through this uncertainty.

Now I will turn to our outlook for the full year and quarter 3. As we look to the remainder of the year, we are closely monitoring the evolving tariff dynamics in addition to consumer confidence and behavior. Given the upside in the first half of the year, continued strong execution and momentum in our business, we are raising our top and bottom line guidance. For the full year, we have increased our expectations for organic net revenue growth by 1 percentage point to 4.5% to 5.5%.

We are increasing our reported net revenue growth by 3 percentage points. This equates to a reported net revenue growth of 1% to 2% for the year. This incorporates a 50 basis point drag from foreign exchange versus the 250 basis points incorporated in our prior outlook. Our guidance continues to assume a 3-point headwind from the exit of Denizen, our footwear business, and the 53rd week. We continue to expect gross margin expansion this year despite tariffs. As noted above, we expect an approximate 20 basis points net impact. Our full year expectation for gross margin is now up 80 basis points to prior year, a new record.

We still expect our SG&A rate to be around 50%. We also expect our gross profit dollars for the year to be significantly higher than the SG&A dollar increase, leading to EBIT margin expansion of 70 to 90 basis points to prior year. As a result, our full year EBIT margin expectations are maintained at 11.4% to 11.6%. And we are raising our adjusted diluted EPS by $0.05 to between $1.25 to $1.30. For clarity, this guidance now includes a net tariff headwind of $0.02 to $0.03 and a $0.14 headwind from tax and FX versus prior year compared to the $0.20 assumed in our previous guidance.

Now let me provide details on quarter 3. For the third quarter, organic net revenue from continuing operations is expected to be up 4% to 5%. This is on top of a 4% organic growth in quarter 3 2024. We expect quarter 3 reported net revenue growth of 3% to 4%. This includes 100 basis points tailwind from FX and a 200 basis point headwind from our business exit. Gross margin is expected to be flat to up 30 basis points after incorporating the impact of tariffs.

We expect adjusted EBIT margin to be in the range of 10.8% to 11.2%. While below last year, this is due to a shift in the timing of marketing expenses from quarter 4 to quarter 3, ahead of the launch of our new campaign, and as mentioned above, an increase in distribution expenses as we progress through our DC transition, which will be completed by the end of the year. And we expect our quarter 3 adjusted diluted EPS to be in the range of $0.28 to $0.30. This includes an approximate $0.01 net impact from tariffs and about $0.02 from a higher tax rate versus prior year.

In closing, we have started the year with momentum, growing faster than the category with both channels contributing. While there is still uncertainty on the macros largely driven by tariffs, we are in a good position to mitigate the adverse impact, given our brand, product and profitability momentum. Our transformation to a more profitable DTC-first denim lifestyle retailer is working and positions us well to drive mid-single-digit organic growth annually and build a road map to deliver 15% operating margins over time. I will now open up the line for Q&A.

[Operator Instructions] Our first question comes from the line of Matthew Boss of JPMorgan.

Congrats on a great quarter. Michelle, could you speak to drivers of the demand strength that you're seeing today? Have you seen any moderation of momentum for the Levi's brand globally to date? And maybe could you help size up market share gains relative to the industry? And then for Harmit, could you just walk through the clear inflection that you've seen in gross margin? What has structurally changed? What levers are durable and really support the higher margin profile that you cited in the release and on the call?

So Matt, thanks for the question. I mean, we are just so pleased to report this quarter our third consecutive quarter of high single-digit growth, plus 9%. And of course, with this confidence, as you know, we raised our full year guide. We are seeing broad-based growth across the business, both direct-to-consumer and wholesale, international and our U.S. domestic business, women's and men's, tops and bottoms. We're seeing it in newness [indiscernible]

So we're supporting that business, it grew as well, but really rewiring this company to be a best-in-class retailer and the evolution from a denim bottoms business to a full head-to-toe lifestyle business. The team is executing. Our product is resonating. The pipeline has never been more robust. A lot of newness, freshness, whether that's in fit, loose, baggy still doing really well. Fabric, our linen denim was a big hit earlier this year. Shorts are doing really well, warm summer. So product is doing great.

And like I said, men's and women's. In women's, we have a distorted focus, as you know, because we're underpenetrated, and we're once again double digit there. The brand has just never been stronger, and that's being fueled really by a variety of things. We're built on a strong foundation heritage but you do have to earn it every day. And so showing up where the consumer is, whether that's social media, center of culture, music, Beyoncé, dressing Shaboozey. As they say, you are the company you keep and we get pretty good company. And today, NIKE joins that family as well. And based on the lines out the doors this morning, we think this NIKE collaboration is going to be a really big hit.

And in terms of -- as we look forward, as we moved into June, we've seen the trends continue. And I don't think we have any reason to believe they're going to fall off because this is core to the strategy of the business. And then the only thing I would add is market share. We continue to maintain our global top market share position and then our #1 position here in the U.S. for men's and women. Over to you, Harmit.

So on gross margins, let me start by just reinforcing, we're building a stronger, more focused, higher-performing company and one defined by accelerated growth, expanding margins and superior returns on invested capital. So to answer your question about gross margins, the gross margins, we're hitting a record every quarter and we'll hit another record end of this year. '23, as you know, was a little -- was around 57%.

So what are the drivers, Matt? One is the -- structurally the fact that higher DC, higher women's, higher international, higher gross margin. Now that's something you guys have heard over the last couple of years. It's consistent. We're really leaning into it. You've seen it in terms of delivery of results.

The second is narrowing the focus did help. Exit of Denizen, exit of Dockers made a difference. And then in the part of the end, what is the end here? The first is, as part of the transformation, we are taking a harder look at productivity in our assortments. Lower-turning SKUs, let's eliminate them. Our go-to-market calendar, let's get tighter, et cetera. That lease to higher COGS over time.

And then the product pipeline is really resonating so we're really driving full price sales and reducing promotions. So that's really how we're thinking about it. There are some headwinds on tariff. I've talked about it. FX, maybe a little but we hedge it. So some puts and takes, but we feel good. And I'd say if you -- some of you are thinking, are we at the peak of gross margins? I'd say we're not done yet.

It's great color. Best of luck.

Our next question comes from the line of Laurent Vasilescu of BNP Paribas.

I wanted to ask about organic wholesale revenues. In tonight's 8-K, it shows that they were up 6% for 1H. But I think you called out that wholesale should be up slightly for the year, which would imply 2H should be down low single digits. But at the same time, I think, Harmit, you called out the order books remain positive for the balance of the year. So can you maybe square away how we rectify that in terms of math? Or asked another way, how should we think about 3Q wholesale revenues?

Laurent, first, to answer your question that you asked a couple of weeks ago, we did deliver 13 consecutive quarters of same-store sales. So I'll just put that to bed. To your question about -- you asked for it, I want to make sure. I couldn't answer you 4 weeks ago, I can answer you now.

To your question about wholesale, we're just being prudent, Laurent, and judicious in our approach. I mean, our view is, as our wholesale customers with the prebook and the demand signals we're getting, lean into all the product assortments, this channel will continue to grow. It's just important to be prudent. It's a channel we don't control, but over time, we believe the channel should be flat to positive. It's a big piece of our business and we have wonderful partners.

If you think of the wholesale business, we're getting growth from the digital channel, we're getting growth from our premium customers and department stores in the U.S. are a smaller piece of our business, but we are working with them to grow this business over time.

So the growth in 3Q wholesale organically, something like low to mid-single digits, is that the right way to think about it, Harmit?

Yes. We don't disclose by channel but I'd say we'd probably lean in, in quarter 3 more than Q4 only because we're filling the flow for the holiday season. The other thing, Laurent, just for you and for everybody's benefit, think of our business on a 2-year stack. So the first half, we were up 9%. Last year, we were probably flat. The second half, we were probably up last year 4% or 5%. And so a 4% organic -- 4% to 5% organic growth over 4% last year in quarter 3 is actually growing at the same pace. And so that's what I'd like you to think about.

Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

Congratulations, everyone, on the very nice results. Michelle, as you think about the brand and the marketing initiatives, I saw some of the NIKE things today, and I agree with you, was definitely very busy. What are the other marketing thing activations that we should look forward? Harmit, how do you think of marketing spend and price increases? Where are you in price? And how much more does AUR have to go, and which categories do you think there's opportunity?

So I can make mine pretty brief here, Dana. As we said in our remarks, the brand has never been stronger. And that is being fueled by relevant product. Very exciting to see our vision of head-to-toe denim lifestyle really come to life and the consumer is responding. We're investing in the brand, so this -- we always talk about being at the center of culture. And we are driving it and the kinds of partners and collaborations that are emerging and people who want to partner with us is super exciting.

So whether that was sacai, very elevated designer out of Japan. We had a very successful launch there. Today, dropping NIKE. Beyoncé has been a great success. And we've just been thrilled with her being a bit of an ambassador of the brand. Shaboozey wearing our product at the festivals. And then as we look forward, we still have more of Beyoncé to go. And then we are going to have a really exciting campaign oriented to men this fall. So when we think about fall and holiday, I feel like we're really well positioned to make sure that the brand stays extremely strong.

On your question on marketing expense, Dana, around 7%. There's a timing change between Q3 and Q4 and that we indicated so that's how we're thinking of marketing. To your question about AURs, let me just first start with another quarter where volumes were 2/3 of our growth and AUR is 1/3 is, again, the magic of the, like I like to say, it's good to have both.

AUR is essentially broad-based across geographies, across channels and across categories. And the other thing is not coming at the expense of volume. And we have products that are being rolled out that will continue to improve this the Blue Tap which is our premium Tier 1 offer that's done very well in Asia. So again, room to grow from where we are today.

Our next question comes from the line of Jay Sole of UBS.

I have 2 questions. Michelle, at the top of the call, you talked about the 4 key drivers that have been going on as part of the strategy for the last 18 months. Can you just dive in to operate with rigor a little bit? And just tell us why is it, it seems like now that there's an acceleration happening in the business? The capabilities just sort of seem to getting better because the company has been working for a long time on operating with rigor and narrowing the focus and becoming a lifestyle brand.

Just maybe if you can touch on what's really happening now and give us an anecdote from, say, supply chain or something that's happening that's allowing the company to have the strong results that you're talking about today. And then secondly, just on the tops business. I think you said tops were up 16%. Can you just talk about the quality of the tops business? I think in the past, there's a lot of traffic or logo, things like that. Talk about the kind of tops you're selling today and talk about how you feel about that and give us maybe a little context around how that tops business is evolving and the confidence you have that if you can keep growing at a strong rate.

Great. So to your first point, as I did say earlier in the call, we are operating with greater rigor and discipline and really infusing the entire company with a DTC-first mindset. And what does that mean? First, if we start with product. We are in process. We've been talking about reducing the time of our go-to-market. That is happening. We're introducing agility tracks so we can chase products better or in things that turn quicker like tops, they're just on a shorter cycle. So that is happening.

Number two, we have had a massive effort afoot to have a more globally directed assortment. And if I look back a couple of years ago, that number was in the single digits of what was common across the globe. That number is more than 30% first half of the year and it's growing. You can imagine the kind of efficiencies that you get from that. And along with that, we are being really disciplined on reducing nonproductive SKUs. So the reduction is in the team to make way for fresher, newer products that can ultimately turn better.

We are putting a lot more rigor. You commented on the supply chain in terms of service levels, so that service levels in our stores and service levels in wholesale. And then to your point on tops, I mean, this was a complete end-to-end reset, and the team has done phenomenal work. They set a new vision. We brought in new design capability, merchandising capability, vendor, supply chain, you name it. And the success is broad-based and that's what's so exciting.

So we saw growth in men's up 14% and DTC was similar. Women's up 19% overall. So these numbers are both across channels. Denim tops are really driving it. I mean, we are the leader in denim so we're pushing that. Sweaters, workwear. And then on the women's side, things like dresses, jumpsuits, that's in the tops category. And as we said, we really want to own this denim lifestyle and even categories like outerwear. So this is no longer a T-shirt business, just T-shirt business for Levi's. We are in the top business, full stop.

Our next question comes from the line of Chris Nardone of BofA.

Can you help us think about how the margin profile of your DTC business has evolved over the last couple of quarters and where it sits today? And then I'm just trying to think, looking out into next year, is there anything structural preventing you to returning your business to a sub-50% SG&A rate as you strive towards this 15% margin goal over time? I'm just trying to think through the puts and takes of a DTC-weighted algorithm could prevent you from reaching your medium-term plan.

Yes. Chris, I'm glad you asked this question. DTC, yes, the aggressive growth of the double-digit growth in DTC or the 13 consecutive quarters of same-store sales and DTC becoming a 50%-plus business or total mix is not a drag on EBIT margins anymore. It is actually progressing well. Year-to-date is up 400 basis points to last year. Last year, we ended at about 400 basis points. It's probably in the high teens.

There is a gap between wholesale and DTC. It used to be probably in the low teens a couple of years ago. So what is really making the difference? The first is revenue per square foot. I mean, the fact that comp sales are up, the fact that revenue per square foot is the prime driver. It's actually the prime driver of the DTC EBIT margins is a big thing. So we really -- we are measuring it. We are looking at ways to improve it. The throughput of our new product offers is making a difference. The fact that we have more women product in the -- on the floor tops that Michelle talked about, I think that's probably making the difference.

Taking a hard look at cost management, the cost of new builds, the cost of things like labor management, et cetera, is also helping. So those are the factors, I think, that are driving it. I believe we are in the early innings of this. And as you make this pivot to DTC-first, this is something that's going to be important. The only other factor I would say sometimes gets lost in translation, our e-commerce business is now a profitable business. It used to be a drag. We always said you grow the top line, you leverage costs, and that's what's happening.

The business that's growing in the mid-teens, that's making a difference. And as we bring our distribution network, make it more omnichannel, that should again help because you're leveraging fixed costs as against variable costs.

Our next question comes from the line of Paul Lejuez of Citi.

As it relates to the tariff assumptions, I think I heard you say 10% and 30%. Curious where you're planning Vietnam and maybe some of the other countries that we've heard about. And then on price increases, I'm curious what you have planned for the back half and what the implied driver of top line is in terms of units versus AUR.

Yes. Paul, the tariff situation is fluid. It's difficult to plan with every day there being an expected change. So what we decided to do for this guidance is assume an additional 30% for China and an additional 10% for every other country around the world. That's what we have factored in at this stage. I quantified the impact, $25 million to $30 million for the year and 50 basis points of gross margins.

I also talked about things we are doing to offset it and the net $0.02 to $0.03 impact on the business. Overall, the way we think about it is, competitively, we are well positioned, right, despite all the uncertainty. 60% of our business is international. A lot of our core products are multi-shows, both geographically as well as through vendors. And we're thinking '26 at this stage.

To your question about pricing, it's targeted, it's minimal. We're using the new products as a vehicle to try and drive that. But more importantly, we're really focused on reducing promotions, driving full price sales.

Our next question comes from the line of Alex Straton of Morgan Stanley.

Just a couple for Harmit, maybe first just on the sales trends so far this year, mid-single-digit organic, even higher than that. So as we think about a more normalized growth trend as we get some of these kind of temporary factors out of the business, where do you think Levi should be growing at medium term? And then just a more nearer-term question. It looks like the full year guidance assumes that back half SG&A falls compared to growing in the front half. Can you just remind us what's enabling that change in trend?

Yes. So to your first question about top line, I'd say mid-single-digit growth is what Michelle and I and the rest of the executive team are focused on and doing it consistently so that you can get to that $10 billion over time. To your question about SG&A, the fact is, Alex, we have leveraged SG&A year-to-date on a full year basis, because we're looking at organic revenue as a good thumb rule.

Our view is SG&A at 50% does leverage. Where we're spending is largely in areas that make us a better DTC-focused company as against anything else. So I talked about distribution expenses. That remap is happening, a big shout-out to our distribution teams who collaborate with our commercial teams to ensure that we meet the demand, which is there as we make this change.

The second is, I talked -- we talked about earlier the fact that we are going to be opening stores, right, on a net basis, 50 to 60 stores. 20% or 30% of that franchise will largely being operated. We're taking a few markets back. So that's the other piece. And then the ERP upgrade is the other piece that we are working on. But overall, our view is that SG&A does begin to leverage, especially as we get to the mid-single-digit. The way we are thinking about it, Alex, is does the gross profit dollars increase more than offset the SG&A increase, and we're seeing that in flow-through and in EBIT margin.

Our next question comes from the line of Peter Goldrick (sic) [ Peter McGoldrick ] of Stifel.

I was curious on the enhanced loyalty program. You pointed out some encouraging directional drivers. As you roll out in the U.S., can you point to any expectations for contribution embedded in the back half as you roll that out in the U.S.?

We don't break out -- first, Peter, welcome. Second, we don't break it out by channel or by geography. It's what you heard from others, what you heard from us. Our more loyal consumers, our more loyal fans drive higher frequency and are definitely embracing the denim lifestyle offer. And this will continue to be an opportunity. For a brand our size, Michelle and I and the team joke about it. We should be having probably 100 million loyal fans of consumers. And this used to be 0 until just after COVID. And so that's how we're thinking about it, Peter.

Our next question comes from the line of Paul Kearney of Barclays.

I know it's broad-based by geo and channel, but can you give some additional color and detail on the AUR lift for the quarter between promos, price or mix? And then second, can you talk about the expectations on the wholesale business and how retailers are managing inventory? And how is the growing lifestyle assortment with women's and tops enabling new opportunities with retail customers?

Okay. So on AURs, yes, it is broad. I'd say DTC, probably a little stronger than wholesale. I would say women's probably a little stronger than men's. And regions, I would say the U.S. and Europe probably a little stronger than Asia. That's just thinking about the color on how the customers are thinking.

To your question on wholesale, I think we'd say largely inventories are in good shape across the channel. And I think your question on how are they responding to our lifestyle assortment, I think it's been very positive. I mean, certainly, some customers are further ahead than others. But if you take, say, Europe, we have more premium offer even in wholesale, and that business is doing really well with partners like Galeries Lafayette, with Zalando, who are leaning into lifestyle and to women's, in particular, but we're also seeing that take hold here in the U.S.

And so I think as we sit here and even though a big part of our growth is going to be DTC, it is why we increased our guidance even for this year to flat to slightly positive for wholesale, but it will continue to be an important channel. It reaches millions of consumers and we're excited and our customers are excited about all the newness we're bringing to them.

Our next question comes from the line of Oliver Chen of TD Cowen.

You had really nice broad-based strength, but men's lagged women's, and also Asia was weaker than we expected. I know you're undergoing changes there. Would love your thoughts there. And how did your guidance interrelate with your order books? It sounded like you had pretty encouraging order books, but was it the right methodology to raise guidance, given the uncertain environment? And then as you mentioned, life cycle management products. What should we know about what inning you're in? And are merchandise margins, they're not peakish, given the feedback you offered on the call, Harmit.

Yes. So on the question of guidance, it's important, Oliver, if you were in our shoes, you'd feel the same. It's important to be prudent and judicious. And given the demand signals we are seeing, part of it. And so given that we've had 3 quarters of high single-digit growth, we see the momentum continuing because the consumer I think, as Michelle said, generally resilient and continued fan of the brand. So that's question one.

To our life cycle management, this is, Oliver, going back to DTC-first, right? This is about making sure that our store associates and our operations team and commercial teams around the world, especially with the new product offers, are able to drive higher full price sale over a period of time before marking it down, seeing sell-through by store versus by country, things as simple as that. So we are in the process of really focusing and driving an opportunity. You had a question about wholesale or Asia?

Asia and then I can take that men's one.

Yes. So on Asia, Oliver, Asia, we're long on. It's a business that we feel we are underpenetrated. There are markets like India and a couple of other markets, Japan, for example, that are growing very nicely. China is a small piece of a business. It's about 2%. We think '25 is a year where we reset China, and our teams are on the ground right now thinking through that. Probably get back to growth sometime in '26. But over the year, we think Asia grows in the mid-single digit and EBIT margin expand. And then Michelle?

Yes. So I think to your question on men's and women's, I mean, I actually view it, Oliver, as. I mean, we already have so much market share in the men's business. And we've got to continue to obviously protect it and grow it. But 6% we felt was quite strong, and the men's business is responding to the innovation we're bringing in bottoms, things like the linen denim, baggy and loose, it's like [ 555 ], the relaxed, the 578 Baggy, we had to chase that 1 even a bit.

And then our tops business in men's up very nicely, up 14% for the quarter. Clearly, we are seeing an outperformance in women's as we should because we're still underpenetrated there. We're only 38%. And I think we all know that, that business should be at least half of our business, and we're making really good progress. I mean, I think for context, the Levi's women's business is up almost twice in 2019, 2x where it was 5 years ago, and yet we still have so much runway ahead. So I don't think it's an either/or. I think it's an and.

Okay. And did you -- Harmit, did you think merchandise margins are peakish in terms of where you are relative to pricing? And per square foot [indiscernible]

I think our view is that -- and the answer is no. We're in the -- we're nowhere near in the middle of the journey for DTC-first. We're probably in the early innings. So I think as we get better at retail and retailing, it probably improves over time.

Our next question comes from the line of Brooke Roach of Goldman Sachs.

Michelle, Harmit, I was hoping you could dive a little bit deeper into the momentum that you've seen in the Europe business. Outside of the distribution center adjustment, are there any other onetime drivers of outperformance that you think might normalize for the rest of the year? And given the stronger performance and stronger partnerships, what do you think the medium-term run rate of growth could be in the European market ahead?

To your question about onetime, if you -- the best way to look at Europe is to take a year-to-date view. Wholesale is up 7%. I think Europe year-to-date is up in the high single digits. The demand books for the fall are positive. So in our view is thinking of Europe in the mid- to high single digit is a good way to look at it.

Secondly, when the company was over $7 billion [indiscernible] Europe for the $2 billion business, right now, it's $1.5 billion. So we have a clear opportunity. We have a great team on the ground. They're working through it. A couple of years ago, Brooke, we got a little hurt because we didn't have the products on the floor to respond to warmer weather. And today, we have the linen that Michelle talked about. We have lighter weight denim tops. We have a lot of shots. And so we are -- we have product that responds to global warming. Michelle, you were just there so I'm sure you have some insight.

Yes. No, I just -- I know we're at time but I would just say being on the ground the market, we have a phenomenal leadership team there that's executing like crazy. Our DTC business is super strong. The product is relevant. All the things we've been talking about, brand relevance, center of culture, the pipeline. So we are -- we're long on Europe. We still think there's a lot of opportunity.

And with that, we'll close out the call. Thanks, everyone, for joining, and we look forward to speaking with you next quarter.

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

Thanks, Latif.

It's my pleasure.

So good afternoon, everyone, and welcome to the Levi Strauss's fireside chat today. So thank you all for joining us, both in the room and on the webcast. My name is Krisztina Katai, Deutsche Bank's U.S. Retail Analyst. And it is my pleasure to have with us Levi's Chief Financial and Growth Officer, Harmit Singh. So thank you for being in Paris.

So I just wanted to start with Levi's transformation and you're in your third transformation that is currently underway. And Harmit, you've been with the company for over 12 years. Can you discuss the key changes that you made since last year? In particular, what has been working? How long can we continue? And what role does the recent divestiture of Dockers play in the company's transformation?

Sure. Thanks. First, good afternoon, everybody. It's great to be in Paris. I think if you walk the streets to Paris, you can see a bunch of Beyoncé signs signaling our partnership with her. But Krisztina, to your question, yes, I've been with the company 12 years. Yes, it's our third transformation. And our transformation is linked to strategy. And each of the 3 have been with their objective. The first was when I joined the company with the then CEO Chip, we hadn't grown for about 2 decades, the top line, bottom line at the same time in any year. We weren't investing for growth. We were over levered. We were a private company. So it's all about getting the company back to a growth path.

And if that was successful, going public, which is what happened in '19. The second was largely driven by the pandemic. Like all of us, we hunkered down, but we said we'll emerge from the pandemic stronger and it's all about driving more digital business. And so e-commerce, which was, at that time, less than 3%, 4%, today is more like 10%. E-commerce was unprofitable. Today, it's very profitable. And we continue to open stores while other shut stores. And so it made us a better direct-to-consumer business.

I think '21 for us was the best financial year in record in about 2 decades. The third transformation, which we're currently in. It really started with Michelle coming across as the CEO with me becoming the Growth Officer. And the objective is how do you take a $6 billion company and make it a $10 billion company. How do you take a company that this year, we should probably end with a little over 11% EBIT margins, how do you make that 15%. And so that's really the transformation. Our strategies are first is about being brand-led, which is about driving more growth in Levi's and Beyond Yoga, which is a brand we acquired during the pandemic.

The second is all about this pivot to a DTC-first company. And DTC-first is not DTC only. So wholesale is an important piece of our business, will always complement our direct-to-consumer business. DTC today is close to 50%. When I joined the company, it was about 20% to 30%, so a smaller piece. Today it's half the company. And the third is about powering the portfolio, which is about driving international and other brands. So the transformation really focuses on 3 broad areas.

One is we said, okay, if you really want to unlock the potential of Levi's, are there any businesses that are low margin or profitable. And so we exited -- we had a small footwear business in Europe, we exited that. Denizen is what we sold into Target at $30. And we've launched our Red Tab which Levi's in Target a couple of years ago. So we exited Denizen. And then we took a hard look at Dockers. And the divestiture of Dockers was largely because Dockers was in a category that was not growing. It was diluting our growth because it's been in a decline for a while and it was not making a lot of money, in fact, largely breakeven. So we said we will divest from Dockers. The other thing we're doing to narrow our focus is as we build a phenomenal product pipeline, our innovation calendar and our product pipeline has never been stronger.

We are actually reducing the SKUs that are not as productive. So it's all about narrowing the focus. The second big aspect of the transformation is changing the way we work. It's taking our go-to-market calendar from 16 months and bringing it down to 12 to 13 months. It's driving more global directive assortment. So if you go to our stores last year, the commonality was about 8%, 9%. This year, it's more like 30%. And can we take a big bet and then make sure it's across the world, which is about directive assortment. And the third is driving productivity in our direct-to-consumer business. So our direct-to-consumer business is less profitable than our wholesale business, higher gross margin but lower profitability.

And so the question is, can we drive higher revenue per square foot and can we improve profitability. As an example, in Q1, profitability was up 500 basis points from a year ago. Last year is up 400 basis points. We're narrowing the gap. And so those are the elements of the transformation, Krisztina, and they're working. The transformation office reports directly into me. I've got a small group of folks. So what I call the internal consulting arm, and they are helping our different teams around the world to try and drive this.

Right. So sticking with the transformation, if you could talk about maybe how consumers' perception of the Levi's brand has shifted over this time? And then what has been the reception or any resistance that you have seen from pushing into more of a lifestyle brand from predominantly a denim brand?

A couple of things. First, as of last quarter, we were market leaders in the U.S., market leaders in men's, market leaders globally. We took the #1 market leadership position in Women's, and we're leading with the Youth, 18- to 30-year old. When I joined the company, the average age in the U.S. for men and women, both categories, it was in the high 40s, is now in the low 30s. And that's not happened by accident. It's taken -- the change has happened over time.

It was largely -- the company I joined 12 years ago was largely a men's bottoms business skewed to the U.S. and skewed to U.S. wholesale. The company today is a better -- a gender mix between men and women. The women's business is close to 40%, on the way to 50%. It used to be 1/5 of the business. It was a business that was less than $1 billion, declining with 30% EBIT margins. Today, it's the fastest growing of the 2 genders. It's growing double digit, is higher gross margin than Men, so accretive to the company and a huge runway for growth. So the better gender between men and women is clearly a change.

The younger consumer clearly a change. The business that we're trying to evolve to and the consumer is giving us license is more a denim lifestyle. So it's not lifestyle for lifestyle's sake, it's denim-focused lifestyle. I was just telling a group of investors earlier because the question was, can you do just about anything and that, as you know, in strategy, that's the recipe for disaster. We narrowed our focus. We said, if we are denim leaders and denim leaders in bottoms, can we be denim leaders across all clothing, denim dresses, denim skirts, denim jumpsuits, the shirt I'm wearing, which is a lighter weight denim shirt western wear.

And so by narrowing the focus, we actually expanded our opportunity. We're also expanding our TAM to include non-denim. And that's chinos for him, Performance tech, which is like the ABC Lululemon pant because that's what they wear in a hybrid work environment, and that's having a huge success. We just launched linen, but it's denim inspired linen. And so to your question, I think the consumer is giving us permission as long as we lead with denim, and allow us to get into adjacencies that are linked to who we are. And so I think the opportunity is immense. I think the category, Euromonitor says, is expected to grow in the mid-single digit. Our growth algorithm is in the mid-single digit for the next couple of years, that's what gets us to the $10 billion.

Good. Great. And just given the tariffs are top line for many of us and for most investors as well, maybe if you could talk to us about your global sourcing exposure. Just how has that changed relative to the first round of China tariffs of 2018 and your ability to mitigate the pressures in the current environment? And then a follow-up to that is, have you seen any changes in consumer behavior as a result of some of the mitigation efforts?

So -- yes, I'm glad it's question 3, not question 1, but it's a question. So tariffs, just think about the company. In 2018, you're right, which I say is tariff 1.0, we were importing into the U.S. about 15%, 16% from China. We made a period, it took us 12-plus months. And today, it's approximately about 1%. So we reduced that dramatically. And I'll explain how that happened in a minute.

The second is Mexico is close to over 10% is about 5% now. Vietnam is probably in the mid- to high single digit. Our sourcing base, we source from about 28 countries. We source from 20 countries into the U.S. A lot of our vendors have factories in different countries. They learn from tariff 1.0. That allowed us to also diversify. A lot of our products are core, thing, the 501 thing, the 511, and we source from multi vendors.

Our product is not rocket science. Yes, as long as you work with vendors and you upskill them, that's something they can manufacture. And so as we think -- so it's a very diversified supply chain, plus the company is diversified. A company used to be concentrated in the U.S. It was primarily a business today. 60% of our business is outside the U.S. And so we have that global footprint. And growth is happening at a dramatic pace outside the U.S. We've been growing in the high single digits. 75% of the apparel market is outside the U.S., 60% of our business currently is outside the U.S. So we have an opportunity to grow that over time.

The way we are thinking about tariffs, I mean, if the base case is a 10% increase into the U.S. and maybe the 30% that's on the cards with China, we are looking at, can we mitigate that through cost, can we mitigate it through vendors, negotiation and then pricing. And pricing is not about just taking prices up. We are driving higher full price sales because the product pipeline is working. We probably reduce our markdowns because inventory is in a good position, both with the wholesale retailer as well as us, et cetera. And so if that's the base case, I think we have a good chance of mitigating the impact. If the base case is reciprocal tariffs that would probably take us a little longer because we've got to really think through supply chain moving and cross-sourcing from a bunch of countries takes a little longer.

We were able to do it a couple of years ago. And I think we can easily do it because we are the market leader in the products we make. To your question about consumer. Consumer in the U.S. is surprisingly resilient. And I'm not going to get into the quarter largely because we just closed our quarter. But when we reported results for quarter 1 in early April, we did say the March trends were a lot stronger than when we exited the quarter, which ended in February. And so the consumer generally has been resilient in the U.S. Consumer in Europe, we are seeing stronger than we had originally anticipated, consumer in Latin America generally in a good spot in Asia, other than China, also in a good spot.

China, we have a small business, so less than 3% of the business. They're going through some macro headwinds. We also -- you didn't ask the question, but I'll answer because I've been asked this, are we seeing a backlash. Because we're an American company. It's who we are. We've been overseas for about 80 years. There's very little local competition. We have competitors, but they're likely global competitors. And so, so far, knock on wood, we haven't seen backlash against our brands. But obviously, it's something we watch out for. We have teams on the ground, they engage with the communities, and a large piece of our business is local consumers. And so, so far, that's holding up.

Well, that was going to be my follow-up question. If you've seen any of the anti-American sentiment, but you just answered that for us. So maybe if you could talk about the strong performance that you have seen in your DTC, so direct-to-consumer business, and if you could just touch on what are your plans to further optimize the channel, store opportunities, both as you think about expanding in the U.S. as well as internationally.

Yes. So it best kept secret because we grew up as wholesalers, but the greatest opportunity. So if you take our direct-to-consumer business, which for definition, is our own stores, we have about 1,200-or-so across the world. We have another 2,000 stores largely run by franchisees. And so -- because I look after, as part of our growth portfolio, all the real estate and franchisee expansion, it's important that franchises also grow. So last year, we opened about 100 net doors, 40 were franchisees around the world. So Europe, for example, is a mixed market. We have 800 stores, 400 franchise, 400 companies. So getting the franchisees to grow is an important piece of the remit.

But your question, our direct-to-consumer business, which is about 1/5 of our total business, when I joined as of last quarter of quarter 1, was 52% of our business. And I jokingly say and -- but it's true, our direct-to-consumer business is delivering what I call a trifecta. Our comp sales have been positive now for about 12 consecutive quarters. We are opening new doors. Last year, we opened net 100. This year, we have -- our guidance is 50 to 60 net.

And then our e-commerce business has been growing in the mid-teens. Our e-commerce business is now 10% of our business, on the way to 15% and hugely profitable. EBIT margin is probably higher than the company, and that's in a good place. So our view is our direct-to-consumer business can head closer to 55% -- between 55% and 60% of our business. While we either keep wholesale flat to slightly up, so the growth is really going to be driven by direct-to-consumer in the high single-digit. That's what our growth algorithm of mid-single digit talks about.

The other thing that we're really focused on is driving productivity in our direct-to-consumer business. Our direct-to-consumer EBIT margins are lower than wholesale, will always be but we're narrowing the gap. And what are we doing to do that? One is the higher productivity per square foot on revenue. Take our stores, if our women's business is truly to be 50% of our business, our stores currently don't have the flow space dedicated to women at 50%. It's a little lower than that. Wherever we've been able to give equal space to women as men, the business is 50-50. Take the mainline stores in the U.S. Mainline is full-price store. We have about 75, 80 of the stores. A couple of years ago, we had about [ 8, 10. ] So we have dramatically increased that.

And our women's business in our own stores in the U.S., full price stores is over 50%. And they're high gross margin. And we think that's an option. Our view on stores in the U.S., full-price stores, we probably can double that over time. Europe, we'll be opening a couple of stores a year. Asia is where the bulk of the openings are across most of the Asian markets. And I'm not even counting China because China will take a little while, we think, to sort and self out. And so that's why our view is DTC continues to grow, continues to get more profitable.

And the thing I haven't talked about is waist up, which is what we call tops. Our tops business is about 1/5 of our business. We sell 4 bottoms to a top. It used to be 7 bottoms to a top. Our view is we have to get to 1:1 ratio. And the consumer, to your second question, doesn't probably think of us as much. If he or she wants a top, they think of us more as a place where you can get good bottoms. And that's the journey we are on. But that's something that we are trying to drive in tops business, has been steadily growing 7% to 10% a year and is not dilutive to overall gross margins.

Right. So you touched on some of the drivers there between DTC narrow and the gap in profitability, but we have this 15% operating profit margin target. Can you maybe bridge us on how you get there from today's levels, just maybe breakdown between opportunities, the cost of goods sold versus SG&A. And then ultimately, is 15% operating margin, an absolute ceiling, or could there be upside later down the road?

Yes. So to your question about the bridge to the 15% operating margins, the -- let's say, we end the year in the mid 11s. If you look at the trajectory in the last 3 years, '23 was probably a little around 9%. '24 last year, we ended a little over 10%. Because -- I've taken our Dockers because Dockers was really low margin, this year in the mid-11s. So we've steadily grown our EBIT margins, and it's been -- and if you look at top line growth, in '23, it was flat, '24 organic growth was 3%. This year, our guidance is 3.5% to 4.5%.

So our view is we can be a mid-digit growth company. That's important because that drives leverage on SG&A. Our view is gross margin acceleration -- and gross margin in the last 3 years have accelerated really nicely. '23 was a little under 58%. Last year was a record at 60%. This year, we've indicated 100 basis points improvement, so a little over 61%. And the first quarter was a nice beat in gross margin. And so I think gross margin will continue to accelerate. Why will it accelerate? Couple of reasons.

One, the businesses we're trying to drive, which is women's where DTC, international, all higher gross margin. And so gross margin acceleration just structurally is here to stay. We're also driving higher full price selling because our product pipeline is strong, is hitting home, is relevant and that should have its own benefit. Plus as we are able to reduce our go-to-market calendar, are able to reduce and drive more productivity in our assortment. That also helps gross margin.

I haven't quantified all that, but that's additive. SG&A is an interesting one. For a business that's moving to -- or is going towards DTC, one can argue, SG&A grows. And the way we think of it is SG&A as a percentage of revenue, in and around the 50% is a good place to be in. As we drive more productivity on our direct-to-consumer business, you're able to leverage the SG&A growth. And so if you're growing mid-single digit, you're probably leveraging SG&A, and that drives your EBIT margin. So that's our thinking. That's our path to 15%.

Is 15% a ceiling? For a business that's growing higher DTC and continues to grow middle -- mid-single digit, probably not. But let's get there first, and then we'll think about it from there on. I mean it's clearly a mandate. Our commitment with our Board is to get to $10 billion and 15%. Our long-term incentive plans, which the next 3 years plans, a lot have that trajectory built in. So it's clearly a commitment from our CEO, myself, the executive team and the Board's there.

Great. That was a good overview. And just touching on some of the categories, so denim bottoms are trending well. How do you see the health of the global denim market and your share within that? And then you have other initiatives. You talked about the launch of linen, as well, just any other categories that you're excited about, especially as you think about women's opportunity and then younger consumers?

Yes. I mean the world has become a lot more casual. And I think that's a good tailwind. The prediction, at least from Euromonitor is the denim category grows in the mid-single digits. The activewear category is expected to grow faster. Denim, dresses, skirts is expected to grow faster. And so the -- as we think about our TAM, that's why again expanding on non-denim presence is a less known fact, but we probably sell -- 30% to 40% of our product is non-denim. And so we already have the license or the permission from the consumer. And the question is, can you grow that -- and that's been growing nicely. And so the question is, can you grow that over time. And one of the reasons to exit Dockers was, if you just looked at Levi's and Levi's share in the casual pants segment in the U.S., we were already higher than Dockers.

And so the question was, if you're already higher than doctors, can you grow that segment over time, unconstrained. And so that is another reason that drove that thinking. So our view is that's where we say mid-single-digit growth, Krisztina not higher. But over time, I think we can grow that. And then as I said earlier, international is still underpenetrated. China is still 3% of our business. At some stage, the macroeconomics in China improve and we get our act together and we can unlock that market. So I think there's a bit of an opportunity there. India, we're #1 in men's, #1 in women's. In fact, we're #1 in apparel across the board. And as the young consumer, we have 450 stores largely franchised. We've got about 15, 20 of our own company-operated stores. So we think that's another huge opportunity longer term.

And I wanted to touch on just your pricing philosophy in terms of AURs are higher versus when you first joined naturally. But just how do you feel about AUR levels relative to where the market is, some of your competitors? How do you think about absorbing some of the costs to provide value for consumers, especially in this environment? And then just over the medium to longer term, like is there more room for AUR increases down the road?

Yes. I think I'll love the fact that AUR is better and there's huge opportunity. But the way -- one thing because I grew up in Pepsi and Yum!, where it is very important that transactions and volumes also increase. And if you think the last 2 quarters, 2/3 of our growth were actually higher volume, 1/3 of our growth was AUR. That means we're selling more. As we open doors, we sell more, we also -- through our existing doors, comp sales is also a combination of selling more. And that's about getting more consumers, especially as we get higher frequency from our younger consumer that makes a difference.

AURs have grown nicely, as you rightly say. I think the opportunity on AUR is a couple. One, as we drive higher full price selling because that's an opportunity for us as we become more of a retailer, that should help AURs. Higher DTC mix will help AURs because our DTC business has higher AURs on wholesale. Pricing. We have pricing opportunity. Our price value is really good. That's where you've seen the growth over the last couple of quarters. I think relative, especially on the women's side, I think we have good -- and when we look at the brand equity scores, that's clearly an opportunity.

The thing that we are underpenetrated and now we have a product line, it's called Blue Tab is our premium product. We just launched it in Asia, 30% of Asia is premium and it's doing really well. It's basically made in Japan or inspired by Made in Japan. That's really the thinking. We've just launched it in the U.S. across 14 stores, so not a lot of stores, but again, doing well, and we're bringing it to Europe. So I think we can grow the premium piece of our business.

The consumer is giving us permission to introduce premium product, and that will also drive AURs over time. I'm a big believer that the Made in Japan and the Blue Tab line, which is a small piece of our business can be a bigger piece of the business. I'm wearing the Blue Tab denim bottom, for example, but it's an opportunity for us. So those are the things that I think drive AUR over time.

Yes, it's great. And then just still thinking about your overall business. And I just wanted to touch on your wholesale partners in particular. How are you planning inventories with your key partners? If you could touch on those conversations for the balance of the year. And just given the level of volatility that we have seen in overall consumer confidence, that might be more of a U.S. question, but have any of the partners become more cautious with their order books?

Yes. I think we haven't seen cancellations. Our prebook -- in Europe, we have a prebook business model. Prebook for fall/winter is positive right now, where about 40% to 50% of the wholesale demand is booked in advance, 6 months is positive. In the U.S., similar, we haven't seen cancellations. People are being prudent. Because our products are working. And DTC is a good proof point. If the DTC business is doing well, that's what partners lean in and say, okay, we need that product. And that's, I think, a big piece of what's happening. I think wholesale customers or partners are generally conservative. The good news is inventories are generally lean across the system, especially when you benchmark versus '19.

And my own view is that even despite the last 2 quarters, where top line has been growing in the high single digits, and wholesale has been relatively strong, we have to be cautious and conservative. So the way we are looking at it is and I'd rather miss a sale than have too much inventory, and the inventory that we are really targeting is the -- is newness and innovation. We have -- and it's clearly working. Our partners want it, is working in our stores. So that's what we're really looking at. And we're trying to be a little bit more surgical and faster in cleaning up some of the older assortments that were slower moving. And so -- and that we're managing inventory. So we don't have too much inventory just because you want to try and get inventory in earlier so that you don't pay the tariffs. So you're able to mitigate the exposure on tariffs. So we're just being balanced there.

And the other thing, I think as we improve our go-to-market calendar, we have got a lot more religion on chasing into inventory. In the past, we're probably buying 100% of what we thought we'd sell. Today, we're buying much less. And we're chasing into stuff that works. It may cost us a little bit more in airfreight, but it does prevent us from spending all the cash and bringing the inventory in. And so I think that's the other balance that's being looked at.

Okay. And -- Well, we have about 3 minutes left, so let's see how many more we can squeeze in here, but I wanted to ask you on Beyond Yoga. It's been a great acquisition for you. It has put up some really nice growth over the past few quarters despite what appears to be elevated competition in the market. So what do you think are the keys to your success? And what do you think differentiates Beyond Yoga versus the competition, both lower and higher price in the eyes of the consumer?

Sure. So just for folks here, who probably don't know, we bought Beyond Yoga late '21. It was largely because the performance in the activewear segment was on a tear. It was a little less than $100 million -- it's a little over $100 million. The reason we bought Beyond Yoga was the product is different. It's a, as the name suggests, you can wear it for more than just yoga classes. You can wear it out. In the evening. They have nice dresses now and so it has a large breadth. It was largely a women's-only offer and largely e-commerce with some niche wholesale retailers and only in the U.S.

The -- our perspective was you can enhance the women's offer. And so we've got dresses, we've got fleece now, we've got outer wear. We've got maternity. You could bring in men's line. That's what we're working on. It launches sometime in the second half of this year and then open doors. We have 5 doors largely on the West Coast. They're working well. We're opening 5 doors this year in the East Coast. And if that works well, you can take it internationally. So that's the thinking, Krisztina. We've got a new management team, largely folks who work in Athleta, Nancy, who runs it to get Athleta from about a $250 million business to over $1 billion. And so they have the experience. And so that's the hope. But like every brand in our portfolio, they have to earn the right to be in the portfolio. And so they -- and they're compensated also, like they would in a private equity enterprise where they're compensated on how the brand performs and the value the brand creates for the enterprise.

Great. And maybe just one final to round this up. Rapid fire on capital allocation priorities. You just -- we just sold Dockers brand, do you see opportunities for further M&A? And what else are you focusing on for 2025?

Yes. So if you think of capital allocation, 3.5% to 4.5% on capital to grow the business, largely new stores, e-commerce and some infrastructure stuff. We're a dividend-paying company. Our yield is about 3%. Our cash payout ratio being dividends and share buybacks, we want to range between 55% to 65% of free cash flow. M&A right now, given that we're just narrowing our focus and exiting the brand, I think in the short term, we're good where we are.

Longer term, if there's an opportunity that accelerates women's or accelerates our tops business, we could look at or international. But in the short term, I think we're in a good spot. Our debt is on a good level. Our leverage is a little over 1%. So generally, a strong balance sheet. And as we said about Dockers, even though we sold it for over $300 million, which is 1x revenue, net proceed is about 2/3. We said we returned $100 million, which is half those net proceeds back in the form of share buyback. We've been conservative, given the macro headwinds. If things are clearer, obviously, that could be a little higher.

Okay. Great. Well, that's probably a good place to leave it. So thank you, Harmit. It was a really good conversation. Thank you for attending, everybody, both in the room and on the webcast. So this will conclude our fireside. Thank you so much for joining us.

Thanks, Krisztina. Thanks for having me. Bye.