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

Explicit Guidance:

• Full Year Fiscal 2026:
  • Reported net revenue growth: ~7% (up from previous 7–7.5%).
  • Organic net revenue growth: ~6% (high end of previous range).
  • Gross margin: ~63% (includes ~80 bps net tariff refund benefit; non-tariff margin higher than prior outlook due to lower product costs and tariff rates).
  • Adjusted SG&A as % of revenue: ~51% (includes ~50 bps redeployment of tariff refund benefit).
  • Adjusted EBIT margin: ~12.1% (includes ~30 bps net tariff refund benefit; non-tariff margin up 40 bps YoY).
  • Adjusted diluted EPS: $1.54–$1.56 (includes $0.04 net tariff refund benefit).
• Fourth Quarter Fiscal 2026:
  • Reported net revenue growth: ~3%.
  • Organic net revenue growth: ~4%.
  • Gross margin: ~61.8% (up 100 bps QoQ; includes ~10 bps net tariff refund redeployment cost).
  • Adjusted SG&A: Includes ~$30M tariff refund redeployment costs.
  • Adjusted EBIT margin: 11.4%–11.6% (includes 180 bps net tariff fund redeployment costs).
  • Adjusted diluted EPS: $0.36–$0.38 (includes $0.07 net tariff refund redeployment benefit).
• FY2027 & Long-Term:
  • Revenue growth algorithm: Mid-single-digit growth.
  • Target operating margin: 15%.
  • Distribution cost benefits: Expected to begin realizing in 2027 following Hebron closure.

Business-Segment Outlook:

• DTC (Direct-to-Consumer):
  • Q4 2026: Expecting at least mid-single-digit growth; Full Year 2026 expected to be high single-digits.
  • United States: DTC returned to positive trends in September/early Q4; U.S. women's business expected to grow high single-digits in Q4; focus on low-rise fits (e.g., Low Loose, Finch Baggy) and mid-funnel marketing.
  • Europe: DTC returned to mid-single-digit growth as weather normalized; strong momentum continuing into Q4.
  • Asia: DTC on track for 7th consecutive quarter of double-digit growth; under-penetrated relative to company average.
  • E-commerce: Expected to grow high single-digits for full year; global platform redesign and AI shopping assistant launching globally in 2027.
• Wholesale:
  • Europe: Spring-Summer 2027 pre-bookings up high single-digits.
  • U.S.: Expected to return to growth in Q4; sell-through trends healthy despite Q4 growth being weaker YoY due to booking timing (ebb and flow).
  • Global wholesale expected to grow mid-single-digits for FY2026.
• Product Categories:
  • Denim: Men's and Women's expected to continue gaining share; focus on expanding beyond bottoms.
  • Tops: Accelerating growth (7% in Q3), with sweaters a key focus for holidays; expansion into elevated knitwear (cashmere) and premium products.
  • Blue Tab (Premium): Double-digit growth in Q3; expanding into elevated categories ($200–$500 price points) like blazers and dresses; head-to-toe lifestyle approach.
  • Beyond Yoga: Growth driven by "Glow Zone" performance collection launched in July.
• Geographies:
  • China: Up 13% in Q3; viewed as a significant long-term growth opportunity.
  • Latin America: Broad-based growth; under-penetrated DTC.
  • Asia: Double-digit revenue growth for third consecutive quarter; ~60 net new system stores planned for Q4.

Market and Competitive Outlook:

• Demand Trends: Denim category remains healthy and robust; competition intensifying in price and style (especially low-rise trends).
• Pricing: No price cuts implemented; utilizing promotions strategically during holiday moments to maintain competitive price-value.
• Market Share: Maintaining #1 position in Men's, Women's, and Youth; gaining share in the $100+ premium segment via Blue Tab.
• Brand Positioning: Shift from "denim bottoms" to "global denim lifestyle company"; 50% of top-line growth driven by non-denim categories (tops, outerwear).

Macro / Industry Outlook:

• Tariffs: Recorded ~$80M in refunds in Q3; 75% (approx. $60M) redeployed into business (60/40 split between SG&A and COGS).
• Foreign Exchange: Reported growth differential (7% vs. 6% organic) attributed to a stronger U.S. dollar; FX expected to be a drag on reported Q4 revenue growth.
• Weather: Unseasonably warm weather in Europe in Q3 impacted foot traffic; trends normalized in Q4.
• Supply Chain: Distribution network transformation in Europe complete; U.S. transformation (Hebron closure, Groveport activation) facing delays due to complexity and a fire incident, with benefits expected in 2027.

Strategic Initiatives:

• CFO Transition: John Vandemore appointed as next CFO (succeeding Harmeet Singh); brings ~20 years of experience (formerly Skechers CFO).
• Marketing Reinvestment: Redeploying tariff refunds into marketing to drive demand, specifically behind low-rise fits and holiday campaigns; marketing spend expected to be higher in 2026 than 2027 as investments normalize.
• Digital Transformation: Global redesign of Levi.com with AI shopping assistant and dynamic outfit recommendations launching in 2027.
• Product Launches: "Glow Zone" performance collection (July 2026); expanded Blue Tab premium assortment (cashmere, silk, denim trousers); winter/ holiday focus on sweaters and denim innovation.
• Collaborations: Recent launch with Sakai (selling out); pipeline includes high-end couture collabs (e.g., Sakai, Miu Miu, Valentino) and commercial collabs (e.g., Shaboozie); "Behind Every Original" campaign with Rosie (Asia) driving momentum.
• Capacity/Expansion: ~60 new system stores planned for Asia in Q4 2026.
• Shareholder Returns: $100M share repurchase program announced; dividend increased by 11% in Q3.

Risks and Headwinds to Outlook:

• Execution Risks: U.S. DTC underperformance in Q3 due to back-to-school campaign misses and failure to pivot quickly to low-rise trends (corrected in Q4).
• Supply Chain Disruptions: U.S. distribution network transition delayed by operational complexity and a fire incident at a facility, pushing cost savings to 2027.
• External Factors: Weather variability (Europe Q3), intensifying competitive pricing/promotions in the denim category, and FX volatility impacting reported numbers.
• Caveats: The 2026 margins and growth include one-time tariff refund benefits; 2027 growth expectations assume normalization of marketing spend and distribution costs.

Management Tone on the Future:

• Confidence: High confidence in Q4 recovery (DTC mid-single-digit, Women's high-single-digit) and ability to "lap" current results in 2027.
• Agility: Management emphasizes rapid pivoting (e.g., shifting marketing spend to low-rise) as a key strength.
• Strategic Clarity: Reaffirmation of "DTC First but Not DTC Only" strategy and the transition to a diversified lifestyle brand.
• Margin Path: Committed to 15% operating margin long-term; views 2026 EBIT margin of ~12.1% as a new base to build upon in 2027.
• Tone on Departure: Harmeet Singh expresses pride in the 14-year transformation and confidence in the new leadership (Michelle Goss, John Vandemore).

Miscellaneous:

• Tariff Fund Mechanics: $80M total refunds; $25M redeployed in Q3, $35M expected in Q4; 330 bps impact on EBIT margin.
• Inventory: Ending quarter down 3%; plan to exit FY2026 inventory levels in line with sales growth.
• Distribution Costs: Higher than expected in Q3 due to parallel running of DCs and fire incident; Europe benefits realized immediately.