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Bloomberg Audio Studios Podcasts Radio news All right folks, Levi Strauss shares, they are trading slightly lower today after dropping as much as 14% on Friday. This is after the company's upgraded earnings guidance still fell short of higher investor expectations following the stock's more than 40% rally heading into that earnings print. Now one key disappointment, at least according to analysts out on the street, is earnings growth failing to match the pace of sales expansion due to tariff and distribution costs. Meantime, got to say, barely. You did have TD Coin raising its price target target on the stock to 26 from 22 a share. And they've got their buy rating.
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A
Yeah, staying bullish. And you look at the street, 13 analysts, 10 of them buys. So is it a sell the news event price to perfection. Mm, we see.
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B
It's a really good point. So let's see what one of the companies members of the C suite have to say. Harmet Singh is with us, Chief Financial and Growth Officer at Levi Strauss. He joins us from our San Francisco bureau. Harmony, it's so good to have you here with us. How are you and how, how is the consumer doing?
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C
Well, thanks for having me, Carol and Bailey, it's great to be here again. You know, we had a real strong quarter, four consecutive quarters of high single digit growth and record gross margins as well as the fact that we were able to raise our full year guidance as well as gross margin and EPS expectations. Overall, as a company, we're a stronger and higher performing company defined by accelerated growth, expanding margins and higher return on invested capital. To your question about the consumer, the consumer is largely being resilient. You know, our products are really well segmented. You know we have Blue Tab, which is our premium high pinnacle product and that's doing well. We've introduced that in the US So far so good. We have a red Tap product that is basically marketed to consumers who earn between 100,000 and over. And that's, you know, based on our results, really done well. And then we have, you know, a signature product sold through Walmart that again had a banner quota and that's for, you know, lower income consumers. So consumer strength really strong. That's where we were able to raise the full year guidance. And our product pipeline hasn't Been stronger. Now if you go outside the US International business was up in the high single digit. And so Asia had a strong quarter consumer. Strong. Europe had a decent quarter consumer in a better place and so is Latin America.
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Well, I'm just going to lay it out for you. I think I bought my first pair of Levi's in a long time just a couple of months ago. My daughter, who's 22, so much younger than me, has been buying Levi's for a while. So Bailey, I mean they're back. I go into the store in downtown in, in the Village and yeah, it's packed.
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Well, you get a partnership with Bey, say all the marketing you guys are spending in terms of targeting both young and older generations. But Harmeet, I want to ask about tariffs. So Levi expects tariffs from China about 30% but increase expectations to 20% from the rest of the world. Where are you sourcing your jeans materials? Is it more, are you more exposed to that doubling in terms of, are you getting materials from Vietnam in place of China?
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Yeah. So overall we're taking a holistic approach as we are able to offset the tariff impact. You know, as you think about this year, we raised guidance in the top line and the bottom line and gross margin. So, you know, we've been able to withstand that. To your specific question, Bailey, we source about 1%. We import into the US from China, a little over a percent from India, most of and Vietnam is in the mid to high single digits. So most of our imports are, are from the Southeast Asian countries. Think Bangladesh, think Pakistan and the rest of Asia. The way we think about our supply chain, it's fairly well diversified. We import from about 20 countries into the U.S. 60% of our businesses outside the U.S. and so we are well positioned to mitigate and offset tariffs. And the way we are thinking about the holistic approach, given that volume is driving a big piece of our revenue momentum and we have tenured vendor relationships, we're working with our vendors, we're looking at different cost efficiencies across our organization as well as being very thoughtful about pricing.
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So let me just ask you though, you guys, did you mentioned you raised your full year outlook. You did warn that tariffs are starting to bite. Profit, profitability to measure by gross margins improve. So these are the good stuff. But again, that tariffs are starting to bite me. Can you tell us what that means? What the bite of tariffs, when, when, how much, you know, any color around that.
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C
Sure. So you know, overall, you know, we were able to raise top line and bottom line guidance despite Absorbing tariffs. And so we are able to mitigate it. To the question about tariffs, you know, tariffs were introduced on Liberation Day. We normally buy our products, you know, six months in advance. And so, you know, we are working through, you know, our efforts and we've got different levers to kind of position it. So you take quarter three, the, the quarter we just reported, gross margins are record. So we're able to offset tariffs because we've got other things working for us, you know, as we grow our women's business, our direct to consumer business and international, all of which are accretive to gross margins and allow us to mitigate and offset some of the tariff exposure. Quarter four, we did guide gross margins to be slightly down versus a year ago. And had it not been for tariffs, we would have grown gross margins. But overall, as we think about the year, we'll report again another year of record gross margin. So we're working on levers for 2026. The good news is we'll end the year stronger and we believe we're well positioned to have another strong year in 2026.
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A
And Carol, we've talked with a good friend Peter Atwater for quite some time about that K shaped recovery where people who are well off are doing much better than those really in the bottom quintile Harmeet when you look at your goods, when you look at the ability to raise prices from the impact of tariffs, which products are you able to more easily raise prices where you aren't going to see consumers push away? And how are you thinking about that strategy as it relates to say, the jeans that you do sell through a Wal Mart where you don't have that gross margin going direct to consumer. And you do have likely, at least when we look at the data consumer who's feeling the pinch of inflation, broadly speaking.
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C
Yeah. And so the first thing, Bailey, to your question is our products are well segmented depending on the income profile of different consumers. I talk blue tab, red tab, Signature. Signature is what's sold into the lower income consumer. We've been very thoughtful about pricing. We're leading with product innovation rather than price. And so we're doing what we can to maintain a price point. It was evident in quarter three. Signature, for example, I think is up in the low double digits for the year. As we think about our other products, the good news for us is our product pipeline has never been stronger. You know, we're leading with loose and baggy while at the same time selling a lot of slim and skinny, both for him and her. You know, We've got wonderful, you know, waist up products. The think trucker jackets, think linen shirts, et cetera, et cetera. And so as a company, we're making this pivot to be more of a denim lifestyle retailer going forward. Our past was all about denim. Our future is going to be about denim lifestyle.
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I just want to know, do you really have a pair of Baggy barrel jeans? I can't get my head around them. I'm trying, I'm trying. I'm just, I haven't done it. I haven't done it. Harmy, what I do want to ask you too is you guys have had kind of a mission, a goal to get to 10 billion in sales by 2027. I think you may have adjusted a little bit. I think also a 15% EBIT margin. Could you reach 15% in the next few years even if sales have not hit that 10 billion? You know, talk to us a little bit about that mission.
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C
Yeah, no, you know, we gave out the expectation of 10 billion and 15% on our investor day in the middle of June 2022. Since then, you know, there's been a lot of change and a lot of uncertainty. As a company we have kind of, you know, navigated our way through uncertainty. We haven't given our new date on the 10 billion and the 15%. Our thinking is probably do that sometime next year. But to your question, the company that we are building and the company that has got the foundation given where we are ending this year, so you take 2025, we'll end about 6% organic growth. Last year it was 3%. The year before that it was flat. If you think in EBIT margins this year we land about mid elevens. Last year it was in the mid-10s. The previous year it was about 9. So we have seen a steady progress and our view is we probably get to the 15% faster than we get to the 10 billion but, but really a company that is steadily delivering mid single digit growth in a category that probably grows a little south of that. So our view is that we will be a market leaders now in the US number one in men's, number one in women's, and really resonating with the youth. And so the question is if you're able to stay at, you know, and implement our strategies, our view is we can continue to be market leader and probably pick up a little bit of share, especially because the denim category is accelerating. We have seen the acceleration in the U.S. we've seen the acceleration outside and that's largely driven by the World becoming more casual.
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Yeah, I have more jeans in my wardrobe than I've ever had in like since high school. Like it's really kind of wild. Anyway, Billy, I know you've got another.
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Question I was just going to ask. In terms of geographic expansion, when you think about China, what's going on with China and also what products do the Chinese consumers want? Is it that high end good or is it more of a bargain purchase?
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C
Yeah. So China for us is still underpenetrated. China represents about 2 or 3% of our business. You know, our business in China has been slow and soft. The Chinese consumer right now is going through a bit of a macro uncertain climate. But the good news for us is they love the brand. Brand equity scores are really solid. We think China can be, you know, a business that grows double digit over the long term. But to your specific question, the Chinese consumer is fairly discerning on the brands he or she gravitate to. There is a high end consumer as well as a consumer that lies the mid market consumer, what we call the core products. So if you think about our Asia strategy, we really, you know, our products are relevant for the mid market consumer while we also offer products for the higher premium end consumer. 30% of the Asian denim category is premium and you know, premium, for example, our highest pinnacle product is largely Japanese, you know, fabric, Japanese denim and inspired by sell vision. So that's what we are selling and I think over time we'll be able to start growing our China business back in the low double digit range.
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Yeah. Interesting.
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Seth.
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I will say, Carol, I know you mentioned you have more jeans than ever.
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I do.
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I have been buying the Sherpa jackets, the denim jackets like crazy. I don't know why. I have three of them in different colors.
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I bought a bunch of denim jackets.
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That's what I mean. I don't wear jeans, I wear chinos. But I wear the denim jackets like crazy.
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I know. I just, I don't know. I love it. I love it. It's like everybody I work, I walk jeans, every.
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C
Yeah. And Bailey and Carol, now we've got the blue tab. It's a fuller jacket. You can definitely wear it to office depending on the dress environment at Bloomberg. I walked in here fairly casual. So something that we are not beginning to offer. We should make your wardrobe at some stage.
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Hey, one last question. Does it feel like. God, I mean the. It's been a crazy year and a lot of stuff coming at everybody, investors, the world at large. Does it feel like things are starting to calm down on a day when we've talked about what seems like progress in a cease fire between Israel and Hamas.
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C
Yeah. You know, as I mentioned earlier, you know, we have lived through uncertainty. You know, the good news for us is the category strong. We have real business momentum. The brand's never been stronger. And we have a product pipeline that is never been fuller, especially as we head towards holiday. You know, our focus right now is making sure our product is on the floor. On the floor. Because what we have seen, Carol, is consumers gravitate to newness and gravitate to what's relevant. And you know, and you know, our view is if we can offer the right product and build a brand experience, and that's where we've got real focus on our direct to consumer business while complementing growth with our wholesale business. So this quarter, you know, both DDC and wholesale was up. You had in the US five consecutive quarters of high growth and it's fueled by both the channels.
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B
All right, well, Harmeet, when you talk with your design team, I like high waist buttons, kind of slim through the legs and then a little flare. I'm just going to put it out there. A little stretch in there too. It's kind of my favorite. My favorite, my favorite. And you are a gem. Thank you.
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C
Yeah. And I'll take that feedback, Karen. I sincerely believe feedback is a gift. And getting feedback from consumers like yourself is something that I'll take upon myself to feedback to our designers.
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All right, I'm going to hold you to it.
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C
All right.
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B
Good stuff, Harmeet. Thank you so much. Harmeet Singh, chief financial and growth officer over at Levi Strauss, joining us from our bureau in San Francisco. Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey with smart business buying. Get everything you need to grow in one familiar place. From office supplies to it essentials and maintenance tools, Amazon Business takes the buying experience you know and love from Amazon. Plus tools that help you save costs and make insights based decisions ready to bring your visions to life. Learn how at amazonbusiness. Com.