Levi Strauss & Co. Q3 2026 Earnings Conference Call - LEVI STRAUSS & CO

Financial Performance:

• Reported net revenues increased 4% to organic growth of 5% in Q3 FY2026; year-to-date organic growth is 7%.
• Global DTC business grew 2% (comp sales flat to last year) due to soft traffic in the U.S. and Europe, though Asia and Latin America delivered double-digit growth.
• Global wholesale revenue grew 6%, with Europe wholesale up double-digits; categories outside denim bottoms contributed ~50% of top-line growth.
• Gross margin expanded 450 basis points to 66.2%, driven largely by tariff refunds (net of redeployment) contributing 370 basis points; non-tariff gross margin expansion was 80 basis points.
• Adjusted EBIT margin reached 15.5%, with tariff benefits contributing 330 basis points; non-tariff EBIT margin expanded 40 basis points.
• Adjusted diluted EPS was $0.48, including an $0.11 benefit from tariff refunds; ex-tariff EPS grew 9%.
• Inventory decreased 3%, reflecting improved health; inventory levels are expected to exit the quarter in line with sales growth.
• Cash returned to shareholders totaled $62 million in dividends; an additional $100 million share repurchase was authorized via accelerated program.

Guidance and Future Outlook:

• Full-year reported revenue growth is updated to approximately 7% (previously 7-7.5%); organic growth is expected at ~6% (high end of prior range).
• Full-year adjusted EBIT margin is raised to ~12.1%, up from previous outlooks, excluding tariff benefits; non-tariff margin implies a 40 basis point YoY increase.
• Full-year adjusted EPS guidance raised to $1.54–$1.56 (previously excluding tariff benefits).
• Q4 FY2026 guidance: Reported revenue growth ~3%, organic growth ~4%; adjusted EBIT margin 11.4%–11.6% (including 180 bps of tariff redeployment costs).
• Long-term goal remains 15% operating margin; current base of ~12% is expected to be lapped in 2027, with margin expansion driven by fixed cost leverage, distribution efficiency, and brand premiumization.
• DTC business expects to return to mid-single-digit growth in Q4 and high-single-digit growth for the full year.
• Asia is projected to sustain double-digit growth, while China is up 13% and represents a major long-term opportunity.

Business Segments and Product Lines:

• Levi's Core Brand: Grew 4%, with men's and women's segments both up mid-single digits; "Low-Rise" and "Loose" silhouettes driving demand.
• Women's Business: DTC performance was pressured in Q3 but accelerated in September; total women's business expected to be up high single digits in Q4.
• Lifestyle Categories: Tops grew 7%, with women's tops up 10%; "Beyond Yoga" up 9% with new "Glow Zone" performance collection.
• Sub-Brands: "BlueTab" (super-premium) growing double-digits; "Signature" up 13% driven by denim tops, outerwear, and maternity; "Beyond Yoga" expanding into higher-intensity workouts.
• DTC Channel: E-commerce grew double digits; AI shopping assistant launched in the U.S. driving 3x average bag-at-rate for users.
• Digital Transformation: Levi.com redesign and platform migration on track for global launch next year to enable personalized experiences.
• Strategic Partnerships: Partnership with "Shabooz" (music) and "Sakai" (couture) launched; collaboration with "Rosie" in Asia generated 3 billion impressions.

Market and Competitive Landscape:

• Market competition in denim has intensified, particularly around "low-rise" trends; Levi's maintains #1 share in men's, women's, and youth categories in the U.S.
• Wholesale partners show increasing confidence in non-denim categories, with Spring/Summer 2027 pre-books in Europe up high single digits.
• Asia remains a key growth engine, with DTC up 10% in Q3 and significant under-penetration relative to the company average.
• Europe faced unseasonably warm weather affecting foot traffic; trends improved meaningfully as temperatures normalized.
• U.S. market saw a shift in consumer preference toward lower rises, which the company quickly pivoted to address.

Risks and Challenges:

• DTC Underperformance: U.S. and Europe DTC sales missed expectations due to weather (Europe) and tactical execution issues (U.S. back-to-school campaign).
• Tariff Refund Redeployment: ~$80M in refunds recorded; ~$60M is being redeployed into marketing, supply chain, and promotions, impacting short-term SG&A and gross margin metrics.
• Supply Chain Transition: U.S. distribution network transformation faced delays and complexity (including a fire incident), pushing cost savings realization to 2027.
• Seasonality and Weather: Unseasonable weather in Europe highlighted vulnerability to climate impacts on retail foot traffic.
• Execution Risk: Requires agility to pivot marketing and inventory quickly to match rapidly shifting consumer trends (e.g., rise styles).

Management Commentary and Tone:

• Tone is confident and forward-looking despite Q3 DTC misses; management emphasizes agility and rapid execution of corrective actions.
• CEO Michelle Goss and CFO Harmeet Singh (departing) highlighted a successful transformation over 14 years, with a strong balance sheet and diversified portfolio.
• Leadership Transition: John Vandemore (formerly CFO of Skechers) named as next CFO, bringing deep financial expertise and consumer brand experience.
• Management expressed strong conviction in the "DTC-first but not DTC-only" strategy and the potential of the denim lifestyle model.
• Harmeet Singh noted that while Q3 had challenges, trends improved in September, reinforcing confidence in the Q4 outlook.

Analyst Questions and Answers:

• DTC Trends: Management clarified that U.S. DTC issues were tactical (back-to-school campaign) rather than brand health; U.S. DTC is now positive, and Europe is back to mid-single-digit growth.
• Denim Category Health: Category remains robust; Levi's is gaining market share, particularly in the super-premium segment via BlueTab.
• Wholesale Sell-Through: Sell-through is healthy in both U.S. and Europe; Q4 wholesale growth may be lower YoY due to seasonal flow/set timing, not demand weakness.
• Tariff Redeployment Mechanics: Redeployment split is roughly 1/3 marketing, 1/3 supply chain/logistics, and 1/3 promotions; promotional intensity is expected to be temporary (Q4 high, lower in 2027).
• Margin Trajectory: 2027 margins will benefit from one-time transition costs ending and volume leverage; marketing spend may increase as a % of sales if returns remain high.
• Marketing Strategy: Future marketing will focus on brand heat, collaborations (e.g., Sakai, Miu Miu), and cultural moments (e.g., Super Bowl campaign with Rosie); 2027 "topical" strategy details not yet disclosed.

Other Key Points:

• Approximately $60M of the $80M tariff refund was redeployed across Q3 and Q4 ($25M in Q3, $35M in Q4).
• The U.S. distribution center (Hebron) was closed in Q3; Groveport facility is ramping up, with benefits expected to begin in 2027.
• In Europe, distribution transformation is complete, and cost leverage is already visible.
• Harmeet Singh's 56th and final earnings call marks 14 years of leadership; he expressed pride in building a diversified, profitable company.
• Holiday season strategy focuses on robust activation, newness in tops/sweaters, and leveraging low-rise denim trends.