Image source: The Motley Fool.

DATE

Wednesday, Oct. 7, 2026

CALL PARTICIPANTS

• Vice President of Investor Relations - Aida Orphan
• President and Chief Executive Officer - Michelle Gass
• Chief Financial and Growth Officer - Harmit Singh

TAKEAWAYS

• Net Revenues -- $1.61 billion, representing a 4% increase on a reported basis and 5% growth on an organic basis compared to the prior year.
• Gross Margin -- 66.2%, an expansion of 450 basis points driven by $80 million in tariff refunds and lower product costs.
• Adjusted EBIT Margin -- 15.5%, representing a 370-basis-point expansion reflecting the net benefit of tariff refunds after $25 million in redeployed investments.
• Adjusted Diluted EPS -- $0.48, which includes an $0.11 benefit from the net impact of tariff refunds received during the period.
• Americas Revenue -- $839 million, increasing 2% on an organic basis as 10% growth in Latin America was offset by a 1% decline in the U.S.
• Europe Revenue -- $442 million, growing 5% on an organic basis behind double-digit wholesale growth that offset softer direct-to-consumer traffic.
• Asia Revenue -- $293 million, rising 10% on an organic basis driven by a seventh consecutive quarter of double-digit direct-to-consumer growth.
• Global Wholesale Revenue -- $882 million, up 6% on an organic basis reflecting broad-based growth across all segments and categories.
• Direct-to-Consumer Revenue -- $727 million, an increase of 2% on an organic basis with flat comparable sales growth due to softer traffic in the U.S. and Europe.
• E-commerce Revenue -- grew 10% on an organic basis, supported by enhanced digital storytelling and the launch of an AI shopping assistant.
• Inventory Levels -- $1.25 billion, a 3% decrease compared to the prior year as management improved the health and productivity of the assortment.
• Beyond Yoga Revenue -- $36 million, increasing 9% on an organic basis following the launch of the Glowzone performance collection.
• Tariff Refunds -- $80 million, representing substantially all expected refunds, with management planning to redeploy $60 million into marketing and supply chain initiatives.
• Strategic Category Growth -- categories outside denim bottoms accounted for approximately 50% of top-line growth, with tops revenue growing 7%.
• Full-Year Revenue Guidance -- approximately 7% reported growth and 6% organic growth, representing the high end of previous organic expectations.
• Full-Year Adjusted Diluted EPS Guidance -- $1.54 to $1.56, raised from the previous range of $1.46 to $1.52.
• Full-Year Adjusted EBIT Margin Guidance -- approximately 12.1%, representing an expansion of 70 basis points versus the prior year.
• Full-Year Gross Margin Guidance -- expected to be up 130 basis points to the prior year, including 80 basis points of net tariff refund benefit.
• Q4 Revenue Guidance -- approximately 3% reported growth and 4% organic growth, reflecting an estimated 100-basis-point headwind from foreign exchange.
• Q4 Adjusted Diluted EPS Guidance -- $0.36 to $0.38, which includes a $0.07 impact from the redeployment of tariff refund benefits.
• Shareholder Returns -- $62 million in dividends paid during the quarter and plans to initiate a $100 million accelerated share repurchase program.
• China Revenue -- grew 13%, with management indicating the market remains a significant long-term growth opportunity.
• Distribution Network -- the Hebron facility was closed at the end of the third quarter, with benefits from the network transformation expected to begin in 2027.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

• Singh stated, "Distribution costs were higher than we expected this quarter and the path to realizing the full benefits of our network transformation has taken longer than we anticipated, reflecting both the complexity of the transition and a fire-related incident that impacted operations."
• Gass noted that the U.S. direct-to-consumer performance fell short because "our back-to-school campaign did not drive the level of traffic and demand we had anticipated," following a tactical marketing decision that did not align with a shift in consumer demand toward low-rise fits.

SUMMARY

Levi Strauss & Co. (LEVI -3.74%) reported organic revenue growth for the third quarter, supported by performance in global wholesale and international segments. Management identified a shortfall in direct-to-consumer traffic in the U.S. and Europe, which the company attributed to unseasonably warm weather and a back-to-school marketing campaign that did not align with shifting consumer interest toward low-rise fits. In response, management reported plans to redeploy tariff refund benefits into marketing investments and supply chain capabilities to support demand during the holiday season. The company also announced the appointment of a new Chief Financial Officer and initiated an accelerated share repurchase program.

• Michelle Gass stated that the company is evolving Levi's from a denim bottoms business into a leading global denim lifestyle company.
• The company named John Vandemore as the new Chief Financial Officer, following the retirement of Harmit Singh after a 14-year tenure.
• Management reported that the U.S. direct-to-consumer business returned to growth in September after the company shifted its marketing focus toward low-rise products.
• The company's AI shopping assistant on its digital platform led to users engaging with the tool adding items to bags at approximately 3x the average rate.
• Wholesale pre-bookings in Europe for the spring and summer of 2027 are up high single digits.
• Management indicated that the Blue Tab premium business is growing double digits and serves as a vehicle to attract new consumers at higher price points.
• The company's partnership with ROSE in Asia generated more than 3 billion impressions and approximately $45 million in earned media value.

INDUSTRY GLOSSARY

• DTC: Direct-to-consumer, referring to sales made through the company's own retail stores and e-commerce websites rather than third-party retailers.
• EBIT: Earnings before interest and taxes, a measure of a company's operating profitability.
• Organic Net Revenues: Revenue growth excluding the impact of foreign currency fluctuations, acquisitions, and divestitures.
• IEEPA: The International Emergency Economic Powers Act, the legislation under which the company received specific tariff refunds.
• Selvedge: A premium denim characterized by a clean edge that does not unravel, often produced on traditional shuttle looms.

Full Conference Call Transcript

Operator: Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Third Quarter Fiscal 2026 Earnings Conference Call for the period ending August 30, 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 one 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.

Aida Orphan: Thank you for joining us on the call today to discuss the results for our third 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 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 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 one question at a time to allow others to have their questions addressed. And now I'd like to turn the call over to Michelle.

Michelle Gass: Welcome, everyone, and thank you for joining us. Over the past several years, we have transformed Levi Strauss & Co. into a more diversified, higher-growth company. We have sharpened our focus on the areas where we see the greatest opportunities to win, expanded internationally, built a more balanced DTC and wholesale model and evolved Levi's from a denim bottoms business into a leading global denim lifestyle company. While we delivered strong results across much of the business, our DTC performance fell short of our expectations during the quarter. As we'll discuss on the call, we have a clear understanding of what worked and what did not, and we have already taken targeted actions to improve performance.

Before I turn to our Q3 results, I'd like to take a moment to speak to the CFO appointment we announced last week. I'm delighted to share that we have named John Vandemore as the company's next CFO. John brings more than 2 decades of financial leadership experience across global consumer businesses, most recently serving as CFO of Skechers, where he helped support its growth into one of the world's largest footwear brands. He is a proven operator with deep financial expertise, a track record of driving profitable growth and margin expansion and strongly aligns with our strategy, brand and culture.

I also want to take this opportunity to thank Harmit for his leadership and dedication over the past 14 years. He has played an important role in transforming LS&Co. into a more direct-to-consumer, diversified and profitable company. Harmit has been a trusted partner to me and to our leadership team, and I'm grateful for his many contributions to the company. Now turning to Q3. As a reminder, all numbers Harmit and I will reference are on an organic basis. The quarter again demonstrated the benefits of our diversified portfolio and reinforce our confidence that we have the right strategies in place to drive sustainable, long-term profitable growth. We delivered another quarter of mid-single-digit growth, up 5% on an organic basis.

And year-to-date, our business is up 7% versus the prior year. Our international business grew 8% this quarter, led by Asia, which has been a consistent source of strength throughout the year and delivered another quarter of double-digit growth, while profitability continues to improve as the business scales. Global Wholesale continued its strong momentum, up 6% with growth across all segments. And our strategy to expand beyond denim continues to deliver results. Categories outside our Levi's denim bottoms business accounted for approximately 50% of our top line growth in the quarter, driven in part by accelerating momentum in tops, which grew 7%.

That said, DTC performance in the quarter fell short of our expectations, driven primarily by softer traffic trends in both the U.S. and Europe. In Europe, unseasonably warm weather across several key markets weighed on traffic for much of the quarter. As temperatures normalized, traffic and sales trends improved meaningfully, and those improvements continued into Q4 quarter-to-date. In the U.S., while our marketing continued to generate strong consumer engagement and reinforce brand heat, we had fewer major brand-building moments than a year ago. In addition, our back-to-school campaign did not drive the level of traffic and demand we had anticipated. Importantly, we moved quickly to address these U.S. traffic challenges and have a clear plan to improve performance.

We are increasing investment behind areas of strong consumer demand, particularly low-rise fits and strengthening inventory positions accordingly. We are deepening our marketing investments, creating a stronger cadence of traffic-driving moments and placing greater emphasis on mid-funnel product marketing. We are strengthening commercial execution across our stores and digital channels with a sharpened focus on conversion and other key productivity metrics. Since implementing these actions, we have seen positive trends in our U.S. direct-to-consumer business. Combined with the continued improvement in Europe, this gives us confidence that DTC will return to at least mid-single-digit growth in the fourth quarter and deliver high single-digit growth for the full year.

To support these efforts and fuel growth, we are redeploying a substantial majority of the tariff refunds we recorded in the third quarter back into the business across both Q3 and Q4. In addition to increased marketing investments, we are putting those funds to work behind sharper value for consumers during key holiday promotional moments and enhanced supply chain capabilities to strengthen our competitive position and support sustainable long-term growth. I'll now walk you through the highlights from the quarter in the context of our strategies, starting with our first strategy to be brand-led. In Q3, we continued to reinforce Levi's position at the center of culture through impactful campaigns, premium experiences and iconic brand moments around the world.

A recent example of this was our partnership with one of our top European wholesale accounts, Zalando, for its fall/winter campaign that featured Lily Collins in head-to-toe Levi's and showcased the breadth of our denim lifestyle offering across Europe. And our debut at Paris Couture Week was another milestone in the elevation of the brand, bringing Levi's to one of fashion's most influential and prestigious global stages. Looking ahead, we have a consistent drumbeat of brand activations and marketing moments planned through year-end with high-impact partnerships, including Shaboozey. And we are amplifying our strongest product franchises such as Loose, low-rise and Super Low through increased marketing support and compelling product storytelling.

For the holidays, we are as prepared as we've ever been with our most robust activation plan in years. From breakthrough brand moments and experiential pop-ups to elevate store experiences, personalized styling and curated gifting assortments, we are creating new ways for consumers to engage with Levi's throughout the holiday season. Combined with strong product newness and focused commercial execution, these efforts are designed to drive traffic, improve conversion and deepen consumer connection with the Levi's brand. Now turning to product. The Levi's brand grew 4% with both men's and women's growing mid-single digits. While DTC pressure was most pronounced in our women's bottoms business, we have moved quickly to increase support behind winning trends and strengthen execution.

Encouragingly, the DTC women's business accelerated in September, and we expect our total women's business to be up high single digits in Q4. In men's bottoms, newer iterations of our icons, including the 501 Loose and 501 Relaxed continue to gain traction, demonstrating our ability to drive growth through both heritage and innovation. In women's, we saw strong demand for wider leg silhouettes and the low-rise trend continued to fuel growth with our Low Loose and newer platforms like the Cinch Baggy delivering standout performance. These strong performing franchises give us confidence in our ability to further scale proven fits and drive future growth.

Importantly, growth in the quarter was balanced across both our core denim business and our expanding lifestyle assortment. Categories beyond bottoms contributed roughly half of our growth in the quarter, expanding our addressable market and building Levi's into a true denim lifestyle company. Tops delivered a solid quarter of growth, led by women's tops, which increased 10%. Growth was broad-based across the assortment with strong momentum in blouses, wovens, sweaters, outerwear and tees. Blue Tab continues to exceed our expectations, delivering strong double-digit growth with broad-based strength across both men's and women's.

As we expand the assortment into more elevated products, including cashmere and premium knitwear, Blue Tab is extending the brand into higher price points, attracting new consumers and further premiumizing the Levi's brand in the marketplace. Entering our fourth quarter, we are confident in our holiday assortment and the continued opportunity to build on the momentum we're seeing across our lifestyle categories. Sweaters will be a key focus, complemented by fresh denim innovation across both men's and women's. Taken together, we are entering the holiday season with a stronger assortment, exciting newness across both lifestyle categories and denim and a compelling offering for consumers around the world. Now shifting to our next strategy to be DTC-first.

Our global direct-to-consumer business grew 2% in the quarter, with comp sales flat to last year, driven by the softer traffic in the U.S. and Europe, as I mentioned earlier. Importantly, both businesses have returned to positive trends in recent weeks. Our DTC businesses in Latin America and Asia continued to deliver exceptional momentum. Latin America delivered broad-based growth across key markets, while in Asia, our DTC business achieved its seventh consecutive quarter of double-digit growth, driven by strong comp sales. Both Asia and Latin America remain underpenetrated from a DTC perspective relative to the company average, providing a significant runway for continued growth. Our e-commerce channel delivered another quarter of double-digit growth.

We continue to upgrade levi.com and recently improved the site with richer storytelling, more dynamic videos and inspirational styling content. In the U.S., we launched our AI shopping assistant, which provides styling advice, helping consumers discover new styles and build complete outfits. While still early, we're seeing fans who engage with the tool adding to bag at roughly 3x our average rate. These efforts are part of our broader journey to build an entirely new digital flagship experience, including a complete redesign and platform migration of levi.com. We are making great progress, and both efforts remain on track for a global launch next year.

Once complete, levi.com will offer personalized experiences, dynamic outfit recommendations, immersive fit navigation and other unique capabilities that will convert more consumers into head-to-toe lifestyle shoppers. We're seeing positive momentum in the business and continue to expect our DTC channel to grow at a high single-digit rate for the full year, including mid-single-digit growth in the fourth quarter. Global wholesale remained a source of strength in the quarter, increasing 6%, reflecting broad-based growth across segments, including in the U.S. The continued momentum reflects the health of our brand with key partners and improving sell-through trends.

Importantly, we are seeing strength across a broader range of categories beyond denim, reflecting increasing confidence from wholesale partners in the breadth of the Levi's offering. The consistent performance we have seen in wholesale throughout the year reinforces our conviction in our DTC first but not DTC-only strategy and demonstrates the complementary nature of our channels, allowing us to meet consumers wherever they choose to shop. Now turning to our third strategy, powering the portfolio. This quarter, our international business grew 8%, led by Asia. The momentum in the region was further supported by our breakthrough partnership with ROSE and a series of pop-up experiences in Bangkok, Tokyo, Shanghai and Seoul. The consumer response was extraordinary.

And together, these activations generated more than 3 billion impressions and approximately $45 million in earned media value. We are also encouraged by the progress we're seeing in China, up 13%, where we continue to strengthen the brand and enhance execution. While still early, we believe China represents one of the most significant long-term growth opportunities within our portfolio, and we are increasingly confident in our ability to unlock that potential over time. Signature plays an important role in our portfolio by extending the reach of the Levi's brand. Signature grew 13% in the quarter, driven by strength in both core denim and our expanding lifestyle assortment.

Denim tops and outerwear, looser silhouettes and new categories like maternity all contributed to the brand's strong performance. Beyond Yoga was up 9%, driven by growth across both channels. Glowzone, our new performance collection, which launched in July, is generating positive early results and supports our strategy of expanding beyond yoga into more occasions like higher intensity workout activities. As we approach closing out the year, we are more confident than ever in the long term. Over the last 3 years, we have built a larger, more diversified and more profitable Levi Strauss & Co., adding nearly $1 billion in revenue, significant margin expansion and stronger earnings while significantly strengthening our cash generation.

With this strong foundation, we see meaningful opportunities to drive sustainable top and bottom line growth across our channels and markets as we further build our position as the leading global denim lifestyle company. And with that, I'll turn it over to Harmit. Harmit?

Harmit Singh: Thank you, Michelle. Before we get into the quarter, I'd like to start by welcoming and congratulating John as the company's next CFO. John's deep financial expertise and strong track record, combined with the financial and growth foundation we have built as a world-class finance team, give me confidence that the company is well positioned to deliver sustainable, profitable growth. While the third quarter had its challenges, our teams responded quickly. As Michelle mentioned, we saw improving trends emerge in September, particularly in DTC and women, which gives us confidence in the actions underway and our updated outlook. We entered the final quarter of the year with improving momentum, strong financial discipline and a clear focus on execution.

Before I turn to the results, I want to address the impact of tariff refunds, which creates some unique dynamics in quarter 3 and Q4 results. During the third quarter, we recorded approximately $80 million of tariff refunds, reflecting substantially all the refunds we expect to receive. We are redeploying roughly 3/4 of the benefit back into the business to support future growth. These investments are expected to be split approximately 60-40 between SG&A and COGS and are focused on the following 3 areas: incremental marketing to drive demand, enhanced supply chain capabilities to improve competitiveness over time and sharper value for consumers during key holiday promotional moments.

Approximately $25 million of these investments were redeployed during the third quarter with approximately $35 million expected to be invested in the fourth quarter. We believe this is the right approach. It allows us to strengthen the business, support our near-term momentum and still deliver on our annual growth algorithm. With that context, let me turn to our third quarter results. Overall, we delivered mid-single-digit revenue growth with net revenues up 4% on a reported basis and 5% on an organic basis. Gross margin expanded 450 basis points to 66.2%. The benefit from tariff refund, net of redeployments contributed 370 basis points to gross margin.

Excluding that benefit, the remaining non-tariff-related gross margin expansion of 80 basis points was driven by lower product costs, partially offset by foreign exchange. Adjusted SG&A as a percentage of net revenues was 50.8%, which included approximately $6 million or 40 basis points of tariff benefit redeployment. Excluding that redeployment, adjusted SG&A increased 50 basis points versus the prior year, driven by higher distribution costs and deleverage from softer DTC revenue growth. Distribution costs were higher than we expected this quarter and the path to realizing the full benefits of our network transformation has taken longer than we anticipated, reflecting both the complexity of the transition and a fire-related incident that impacted operations. That said, we are making progress.

We closed our Hebron distribution center at the end of the third quarter and expect to begin realizing benefits from the closure in '27. In Europe, where our distribution center transformation is complete, we're already seeing distribution cost leverage year-to-date. As we continue to scale and optimize the network, we expect service efficiency and productivity benefits to build over time. Adjusted EBIT margin was 15.5%. The tariff refund benefit net of redeployment contributed 330 basis points to adjusted EBIT margin. The remaining non-tariff-related EBIT margin expansion of 40 basis points was largely driven by accelerating margins in Asia and growth in wholesale. This is a good example of the power of the and in our model.

Even in a dynamic environment, the strength of our diversified business helped us deliver both growth and margin expansion. Adjusted diluted EPS was $0.48, which included $0.11 benefit from tariff refunds, net of redeployment. Excluding this benefit, the remaining 9% growth versus Q3 '25 was driven by EBIT margin expansion and share buybacks. Moving to the balance sheet. We ended the quarter with inventory down 3%, reflecting continued progress in improving the health and productivity of our inventory while maintaining the flexibility to support growth opportunities. We continue to strengthen the life cycle management of our inventory and expect to exit the year with inventory levels in line with our expected sales growth. Turning to shareholder returns.

We returned $62 million to shareholders in the form of dividends during the quarter, representing 11% increase versus last year. In addition, given our strong cash position and confidence in the business outlook, we intend to repurchase an additional $100 million of shares through an accelerated share repurchase program. Now let's review the key highlights by segment. In the Americas, net revenues grew 2%. LatAm delivered another strong quarter with revenues up 10%, fueled by strength across channels and growth in every market in the region. Operating margin expanded 640 basis points to 29.9%, primarily due to the benefit of the tariff refund net of redeployments.

And in quarter 4, we expect the U.S. to return to growth driven by improving DTC trends. Europe net revenues grew 5% similar to the performance we saw in the first half of the year, driven by double-digit growth in wholesale. We saw strength in key markets, including the U.K., Germany and Italy as well as growth across categories. Operating margin increased 150 basis points to 22.8%, driven by gross margin strength. As warmer weather moderated, DTC performance improved. And looking ahead, wholesale pre-bookings for spring/summer '27 are up high single digits, giving us confidence in the continued momentum of the business.

Asia net revenues delivered its third consecutive quarter of double-digit growth, up 10%, fueled by strength across channels, categories and key markets, including Japan, India, Australia and China. Strong gross margin expansion drove operating margin leverage of 220 basis points to 14.2%. Year-to-date, Asia EBIT margin is up 240 basis points to 16.7%, underscoring the improving margin profile of the segment and its growing contribution to overall company profitability. That sustained momentum gives us confidence to continue investing behind the segment with many of our nearly 60 net new system stores planned for Asia in the fourth quarter. Now turning to guidance.

Our updated outlook reflects both the benefit of the tariff refund and our decision to redeploy a significant portion of that benefit back into the business. We believe this balanced approach strengthens our competitive position, supports near-term growth and keeps us on track to deliver our annual algorithm of mid-single-digit revenue growth with a clear path to 15% operating margins over time. Importantly, recent trends reinforce our confidence in the fourth quarter. We are seeing improved momentum in DTC and women's, including positive growth in U.S. DTC, and we are increasing marketing support and investment behind winning products as we prepare for the holiday season.

Overall, we are confident in our ability to lap this year's strong results, inclusive of the net tariff benefits as we set the business up for 2027. For the full year, we now expect reported net revenues growth to be approximately 7% versus our previous outlook of 7% to 7.5%, driven by the stronger U.S. dollar and we expect organic net revenues to be a little stronger at approximately 6%, which is at the high end of our previous expectation. We now expect gross margin of approximately 63% for the full year, including approximately 80 basis points of net tariff refund benefit.

Excluding this, gross margin is higher than our previous outlook, driven by the benefit of the lower tariff rate and lower product costs. We now expect adjusted SG&A as a percentage of revenue to be approximately 51% compared with our prior outlook of 49.7% to 49.9% -- this includes approximately 50 basis points of redeployment of the tariff refund benefit. Accordingly, we now expect adjusted EBIT margin to be slightly above the previous guidance at approximately 12.1%. This includes approximately 30 basis points of net tariff refund benefit. Excluding the net tariff refund benefit, adjusted EBIT margin would be up 40 basis points versus the prior year.

We now expect adjusted diluted earnings per share to be in the range of $1.54 to $1.56 for the full year, including a $0.04 net tariff refund benefit. For the fourth quarter, we expect reported net revenues to be approximately 3% and organic net revenues to be approximately 4%, with the difference reflecting the impact of foreign exchange. We expect gross margin of approximately 61.8%, up 100 basis points versus prior year, including $3 million or another 10 basis points of net tariff refund redeployment costs. Adjusted SG&A for the fourth quarter includes approximately $30 million of tariff refund redeployment costs.

And as a result, we expect adjusted EBIT margin of approximately 11.4% to 11.6% for the quarter, which includes 180 basis points of net tariff refund redeployment costs. This translates to adjusted diluted EPS of approximately $0.36 to $0.38, including $0.07 of net tariff refund redeployment. While the third quarter highlighted a few areas of opportunity, the team responded with agility and urgency and the actions we have taken are already beginning to show results. Even more importantly, the quarter also reinforced the power of our strategy and the benefits of our increasingly diversified business model.

As I conclude, I want to say thank you to our employees, our fans, Michelle and the executive team, our Board, our shareholders, including the Levi's family and the buy-side and the sell-side analysts who follow us. Thank you for your support, your trust and your partnership throughout my tenure. Over the past 14 years, I've had the privilege of being part of one of the most significant chapters in the company's history. Together, we strengthened the business, returned the company to the public markets, built a more diversified portfolio across channels, geographies and categories and significantly strengthened our balance sheet and financial foundation.

But what I'm most proud of is that as the business has grown, so have our people, especially my world-class finance growth and transformation team. I'm deeply grateful to have been part of the journey and to have grown as a leader alongside so many of my talented colleagues. As I look ahead, I wish Michelle, John and the entire company my very best. I'm honored to say that this is my 56th and final earnings call at the company and my 67th as a CFO. And with that, operator, let's open the line for questions.

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

Laurent Vasilescu: Michelle, Harmit, I wanted to ask about your DTC trends in the U.S. I know, Michelle, you provided some color there about traffic trends. But could you maybe just unpack a little bit more what drove the underperformance in the third quarter? Like how did the quarter progress by month? And then separately, Harmit, I think you mentioned that global DTC should grow mid-single digits in the fourth quarter, which is very encouraging. But should the U.S. and Europe both grow mid-single digits? And then I think you also mentioned that you've seen positive trends in the recent weeks. But is that a comment in line with the fourth quarter commentary of mid-single digits?

Michelle Gass: Thanks, Laurent, for the question. And I'll just take the whole one because it's all connected. So kind of back to what happened U.S. DTC, and I mentioned it in my remarks, I'll add a little more color. So -- well, first, I will say the Levi's brand remains very strong, very healthy around the world, including in the U.S. And I know we spoke to what really drove the growth, whether that was global wholesale, up 6%, really strong growth international, up 8%, e-commerce double digit, et cetera. And it's worth mentioning in the U.S. that U.S. wholesale was also positive. So we really can isolate the DTC issue to Europe and the U.S.

In Europe, it was very clear this was a weather-related issue. I mean I think it's no secret that it was very warm and it impacted footfall for the industry, really. And so that impacted our business despite we had lots of great summer offerings, but the weather was at another level. When the temperature started cooling and weather moderated, weather moderated, we saw the trends come back. And so as we are in Europe right now, DTC quarter-to-date, the trends are very robust, very positive and robust. So you should feel good about that. The other thing worth mentioning in Europe is that we had an incredible wholesale business.

So suffice it to say, like I said, the brand is very healthy there. In the U.S., I'll say it again, brand is healthy. This really had to do with kind of a tactical move around back-to-school and how we showed up for that period. And we would say that our back-to-school campaign underdelivered our expectations. And then more specifically, our campaign was all around loose. Loose is still an important business. It's a big volume driver for us, but the market in the U.S. had really shifted to talk about low, low rise was a lot of energy and a lot of competitiveness, frankly, around that. And we saw that softening sort of July and August.

The good news is the team got after it very quickly, and we sharpened our focus. We have the benefit of the tariff refunds. As we remarked earlier, we're reinvesting that back into demand generation, into marketing and into the consumer. And we pivoted into low. And so we're able to do that quite quickly. And so we are already seeing the benefit. So that started sort of very tail end of Q3, but more importantly, into Q4 into September, and we're seeing the results. So to your question on what's happening in the U.S., the U.S. DTC is now back to positive. overall DTC is tracking right now quarter-to-date mid-single digits.

We expect it, let's say, to be mid-single digits for the quarter and then to end the year in what we've been performing at sort of that high single digits. So we feel very good. I mean it's been a 360 approach across marketing, mid-funnel marketing, mid-funnel demand generation, in-store execution, et cetera. And so yes, so like I said, I feel that gives us the confidence to share these numbers that we're talking about for the quarter ahead. I'd also say, as it relates to the U.S. consumer, the category is still strong, and we continue to gain market share with men and women, hold that #1 position between men, women and youth.

So I feel like we've addressed it.

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

Matthew Boss: Congrats on your next chapter, Harmit. So Michelle, maybe if we took a step back, can you speak to the health of the denim category? Has anything changed other than this intra-category trend change that you cited? And can you elaborate on September maybe relative to that 4Q outlook for 4% organic revenue growth? And Harmit, just any operating margin considerations for next year for us to think about relative to the annual margin expansion algorithm that you would see at mid-single-digit revenues?

Harmit Singh: Sure. So you want to go ahead?

Michelle Gass: Yes. Yes, I'll start. So thanks for the question, Matt. So I would say that the denim category remains healthy, robust, and it's attractive, right? You see lots of companies, either if they're in denim being more assertive and competitive or even in some cases, new entrants into the category. So there's a lot of energy in denim. I'd say as the category leader by a mile, like this is good for us, but it also is we got to continue to lead, lead with innovation, lead with fits, et cetera, et cetera.

And so from that standpoint, while I alluded to that in hindsight, we would have done -- we would have approached Q3 or back-to-school differently knowing what we know today, but we've learned. And importantly, when you learn, you pivot, you're agile and the team moved. And we're already seeing results. So I'll get to that in a minute. But as it relates to our relative position, in men's, and I'm speaking to the U.S. now, #1 continues in men's, and we actually gained share and further widened our lead against the #2 player. In women's, we've been solidly #1, again, strengthened our position there. Youth, even despite the level of competition, we've maintained our #1 position.

And I think importantly, we have a segmented strategy. So we have Red Tab, we've got Signature and then we've got Blue Tab, and we are gaining market share in that $100-plus segment. And as I mentioned on the call, our Blue Tab business, while small, is growing double digits, and we think that's going to be a meaningful growth driver in the future. And the end of this is while leading in denim, categories still growing, we are, as you know, Matt, expanding beyond denim. And so our head-to-toe denim lifestyle strategy is working. Half of our growth -- so of our 5% organic growth, half was driven by categories like tops outside of denim bottoms.

Tops accelerated this quarter with a robust 7% growth. So I think all in, we're feeling good about the category, but we're very present of the fact that the competitive nature has intensified, hence, really taking some of that tariff refund money and deploying it back into driving demand and marketing so that we can make sure that we can break through.

Harmit Singh: And Matt, to your question about the annual growth algorithm -- we had a big discussion and debate around this, especially given that the tariff refunds are incorporated in the results. And that's why we talked about the reported results and the underlying results. Overall, our view is that the annual growth algorithm is intact, which is really a mid-single-digit growth company with growth in gross margins and growth in EBIT margins. So let me give you a little bit more color. The organic revenue guidance for the year, we have taken up to the high end of our range. And that's largely driven by wholesale being stronger.

So wholesale, I think last quarter, we said globally would be low to mid. We're now saying mid-single digit. And that is really -- I think all of you have asked us, why don't you grow wholesale, but this is the second year we're growing wholesale globally, and it's profitable. Asia, which was underlevered because it wasn't growing and the margins were lower, also, we have up to low double digits, and that helps operating margin. We end the year at about 12.1% EBIT margins all in and which is 70 basis points versus a year ago. And all of you do a great job dissecting what is tariff and what is not.

Our view is all in, 12.1%, we will lap that going forward. So that's a new base. And so that's how we are thinking about it. So the way to think about it is we end the year on a reported number. We lap that for next year and then build the annual algorithm on it. Now how are we going to lap it? There are expenses that we are undertaking to drive the future growth of the business that won't repeat in 2027. So if you do advertising as an example, as a percentage of sales, it will be higher this year than the 7%, but we don't have to spend at this pace next year.

As an example, distribution, we have talked about, we are making the strategic transformation, but -- and it was a little expensive because we're running 2 parallel distribution centers. It won't be at that pace next year. That's why our view is that we can continue to grow margins and obviously, top line. I hope that helps you, Matt.

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

Jay Sole: I want to follow up on the last question. You talked about -- you gave us great color on the DTC channel trends for U.S. and Europe. But does the wholesale business sell-through trend in the U.S. and Europe look like the DTC trend? Harmit, I think you mentioned that the European prebooks for next spring are up high single digits. If you could just give us a little bit of context for how the sell-through is running in wholesale in the U.S. and EU and how that's impacting the order books in next year, that would be helpful.

Harmit Singh: Well, Jay, I was wondering if you or somebody else would ask a question on wholesale. As I mentioned, channel has done globally performed really well. And it's the -- what I call the power of the 'and'. It's DTC and wholesale, which is important. Now you know wholesale does ebb and flow every quarter largely because you sell in, you set floors. -- timing is different by customer. But overall, wholesale has been performing well globally, including in the U.S. It's profitable, which is really good. And it's across all categories. I mean women's is performing well, Men's is performing well. AURs are up and so is units. So overall, we are pleased with the performance.

I mean, looking ahead and your question -- specific question, Jay, on sell-through, the sell-through is fairly good. We've seen good sell-through trends. It's healthy. The prebooks are strong. We get data on prebooks in Europe, so we reflected that. I think quarter-over-quarter, especially in the U.S., it's pretty ebb and flow. So wholesale in quarter 4 will be a little weaker than the wholesale you saw in quarter 3 in terms of growth year-over-year, but it is not because of weakening demand. I mean -- and let me just assure you. It's just when flow sets are set, when product goes to the customer. But generally speaking, we are seeing a healthy demand from our retailers across the world.

Jay Sole: Got it. Okay. Super helpful. Harmit, congratulations again and best of luck.

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

Dana Telsey: Harmit, best of luck in your next chapter. Michelle, I think you mentioned some events in back-to-school not impactful enough. How do you -- what's your assessment? And what's changing for holiday? Is it the marketing? Anything with product? You mentioned low rise. And also, you mentioned that the competitive environment intensified in price to intensify in price and style? Or what are you seeing in the competitive environment? And just lastly, as you look out to 2027, I think last year was the year of music. This year was the year of sports. How do you think of next year in terms of topical?

Michelle Gass: All very good questions, Dana. Thank you for that. Yes. So let me add just a little bit more. And I will tell you, the teams here, as we saw the issues unfolding, they were all over it. I'd say just both here in the U.S. and globally, the consumer moves fast. And so we've got to just continue to be on top of it. And by and large, we are. I'd say, but there are going to be moments like this. If you aren't quite there with the consumer, then you have an opportunity to react.

And that is, frankly, the benefit of also getting all this data real time in your own channels so that you can impact not only DTC more broadly. But as I've been talking about, as we took a step back, we felt like our campaign in this period of time was not as impactful as it could have been. And you see that in the numbers. Our traffic was soft. And so rather than continue to go with that same direction, we pivoted.

And our diagnostics would say that at a time when, hey, the loose business, and to be clear, it's still a very big business and it's growing, but there was just a lot of energy and excitement, whether that was online, offline around the rise getting lower. And we have plenty of it. It just wasn't our leading message. So when the team understood that, they then quickly moved to pivot into low rise. And what that meant in practice was reshooting the campaign, getting that in stores, remerchandising the store. We have a whole a whole group of content creators in social media. We have let them loose. So all of that is happening as we speak.

So we really put this in place right as we started September. So that was for women. And then for men and men has been a pretty steady performer, but also took the opportunity as a big business for us to also reenergize the men's business. And we did that around our icons, 501. One of the top sellers right now is 501 Loose, so that baggy for men idea. And one of our influencers that also has worked well for us in the U.S. has been Shaboozey, who his star power has only grown over the last year. So we're leaning into a Shaboozey partnership with men.

We're really going after this low rise through digital, social, in-store demand generation, like I mentioned, and then chase more product. So leveraging our supply chain to make sure we have the inventory. And as I said, the indications are good. The U.S. trends in DTC quarter-to-date are positive. DTC globally overall is running mid-single digit, and we expect that to at least carry into the full quarter to be mid-single digit around the world. Similarly, in Europe. Europe is back to mid-single digit, given its pivot out of this very warm weather. And then to your point on holiday, really excited about what's ahead. Being a DTC player now, it will feel very holiday.

So we'll lean into the classic denim innovation, but we're also going to take a big position in tops, in sweaters. We have a lot of innovation coming, fantastic store merchandising, some really innovative creative that you'll see soon. So our intent is to win the holiday, and I'm confident we will. And then you asked about what does this mean going forward? I mean we are upping our marketing game. Again, the tariff refunds allowed us to redeploy right into investing in the consumer and telling our story. We expect that to be a tailwind as we start the next year. And then specifically, what's the big idea for next year?

I'm not at liberty to share that with you yet, but I'd say we're taking all of our learnings over the last 2 years to make sure that we are showing up in an innovative and compelling way for our fans around the world.

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

Rakesh Patel: Harmit, congrats on a remarkable career as well. A follow-up on the earlier margin question. So you're redeploying tariff refunds into marketing, supply chain and sharper value for the consumers. Is it safe to assume these factors are not limited to the back half of this year and they'll continue through the first half of next year as well? I appreciate your long-term algo is for mid-single-digit revenue growth. But if these investments do continue, what's the minimum growth that you would need to see in order to achieve operating leverage going forward?

Harmit Singh: Yes. I mean, Rick, obviously, this is not about guiding next year. I'm going to leave that to Michelle and John and the team -- but our view is the tariff refunds were timely. The business, as Michelle mentioned, softened, especially on DTC and women's, and we acted with agility and speed and utilize that largely against driving more focused marketing with a real product awareness, accelerate our product offer, especially things that are working and promotional -- we didn't take prices down. Some retailers had. We took it up, but that's not something we decided to do because we do provide good price value.

But we said, let's promote because market got a little promotional, especially during holiday events, let's promote so we're competitive. And so our view is it's not something that -- the expenses, incremental expenses don't sustain into 2027. And so our view is a mid-single-digit growth does allow us to leverage to the P&L, and you'll see that flow through to EBIT. We're not running away, and Michelle is completely supportive of this and so is the executive team. We do want to get to 15% operating margins. And if you take the last 3 or 4 years, in '23, I think our operating margins were 9%, -- we'll end this year over 12%.

And so we are on that path and that journey. I hope that answers your question. I can't be more specific, Rick, unfortunately, because we haven't yet completed our financial plan, and John and Michelle would be the best to lay it out for you next year -- early next year.

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

Robert Drbul: Harmit, 56 quarters. That's a lot of quarters.

Harmit Singh: I'm not going to ask you, Bob, how many quarters you've covered, but as a CFO, thank you for that.

Robert Drbul: I guess the first question really for Michelle is when you think about Blue Tab, I think double-digit growth, like what have been your learnings thus far with that initiative? And I guess, sort of similarly, when you think about the brand heat, I would be interested in hearing sort of any of the successes you've had with collabs and sort of what we should be looking for in the next few months in this holiday season around collabs that you're really excited about?

Michelle Gass: Yes, you bet. Thanks, Bob. Thanks for asking about Blue Tab. It's something we all have a lot of passion and belief for that this could be a real opportunity for us. As the denim leader, we have like less than a 1% market share of the super-premium jean category. And that should at least be commensurate with our market share overall. So you can do the math and see the opportunity. And we -- because we have this leadership, we do have all of this innovation and knowledge about denim and the best denim. So for Blue Tab, I'd say the learnings, number one is it is always anchored, of course, in denim authority and denim leadership.

So when we use denim in our Blue Tab, it will be that amazing Japanese selvedge denim. I think the insight we have today versus when we've sold in the past, like denim bottoms of Japanese denim is that this, with Blue Tab, is this can be an entire category head-to-toe, not unlike what we're doing for Red Tab. So we can use a beautiful Japanese denim in bottoms, in jackets, in dresses and skirts. And if you actually see online, you'll see representation of all of those products. But we can also extend into tops categories, but they need to look -- feel different than our core Red Tab.

So I think I said in my remarks that we're getting into really elevated fabrics like cashmere, like Silk, very premium blazers, denim trousers. So you can imagine this whole lifestyle presentation. And so it's going to be a big opportunity for us. And one of our biggest insights is that is -- and we're still work in process is how to merchandise it in the store. And you can see a mixed approach in our stores today of some outstanding merchandising, Harajuku in Japan as an example, to where we're still experimenting. But we will figure this out because it's such an incredible opportunity with price points ranging from $200 to $500.

As it relates to collaborations, also a great way to elevate the brand. Right now, we just launched the Sacai collaboration. So you can actually see it on our site, although it's selling quickly, but that's a great example of us connecting with the highest levels of couture type of thing. We have a few more in the pipeline that we have not talked about yet. But I think what you can expect from us and a recipe that has worked is a real balance between what I'd call more commercially oriented collabs to ones that have this very high-end Sacai. We did Valentino a couple of years ago, Miu a few years ago, sort of that.

And the good news is, given the brand heat today, people are knocking on our doors. So we've already have the pipeline and the calendar for next year, I would say there's some really good ones in there. So you'll be hearing about that. I actually just got the Sacai jacket myself yesterday, but it is selling out. So for those who are interested, you better get after it. And then I think the other piece on brand heat, one of our real exciting moment that's happening today is happening in Asia. So we did a global campaign with ROSE, launched at the Super Bowl. She was part of our Behind Every Original.

That has now manifested as a partnership in Asia, a collaboration. We're doing pop-ups. When you see these pop-ups happening, there are literally thousands of people in line to see ROSE. And it has been a tailwind to how we're getting the overall results of, like I said, Asia overall 10%, China up 13%. And our women's business in Asia is even higher than that, all driven by this ROSE momentum. So stay tuned, lots to come.

Operator: Our next question comes from the line of Kendall Toscano of Bank of America.

Kendall Toscano: Harmit, congrats on the retirement. Just wanted to ask about the -- well, you talked about greater-than-expected complexity in the U.S. distribution network transition in the U.S. And just curious, how should we think about this in light of what was supposed to be an immediate $5 million in cost savings per quarter as soon as you shut these parallel DCs down in 4Q. It sounds like we now shouldn't expect to see any benefits until 2027, but any visibility on when in 2027 and what besides the fire that you called out has been more challenging than you anticipated?

Michelle Gass: Sure, Kendall. I can take this one. I'll first say that we are disappointed more than anyone that this transition has taken as long as it has, and it's been more complex. And I think as we've kind of ramped this up with our partner, we do have a complex business given the number of SKUs we have, the number of channels, the number of customers. We will get there. It's just taking more time. And we did mention the fire that happened towards the end of the quarter, which just was a big disruption in some of our most important weeks. And so it was what it was. The team recovered fine.

So I guess we're just being patient and realistic in terms of when we will see the benefits. I do think a very important milestone that we achieved was closing our parallel Hebron facility. So we closed at the end of Q3. With this behind us, we truly can begin to see the benefits in 2027 because we will not have that running. As it relates to Q4, I'd say, as Harmit was speaking to earlier, I mean, the good news is we do have a lot of demand from both channels. So we need to make sure that Groveport is set up to fulfill the demand.

And that's why we're making some investments along with our partner to ensure that we get the productivity, we get the service levels, we get the inventory right and then over time, get that cost efficiency. So we believe we're confident we will begin to see that in 2027. We're not guiding 2027. We'll talk about that more. But we believe that 2026 let's call it, the peak of what has been our transition-related costs relative to this. And the last thing I would leave you on is that the proof point for us is we did complete a complex transition in Europe, and that took some time.

That's now behind us, and you are seeing the EBIT performance and benefits of that. So that does give us confidence that we will get behind this. I think 2027 is very reasonable and realistic to start seeing the benefits. And like I said, closing that Hebron facility was an important milestone to say we have the confidence that Groveport will fulfill our needs. Now we're working through the operational complexities there.

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

Irwin Boruchow: Harmit, best of luck. We'll miss you, been a pleasure working with you. I'll ask just 2 questions. On the 4Q guide relative to 3 months ago, is there any change on the revenue guide? It looks like it's a little lower than the implied before, but I just want to check that to you guys. And then on the reinvestment of the refund on gross margin, Harmit, can you just be a little bit more specific, what exactly are you guys doing? And why is that not a drag that we need to think about that potentially kind of lingers into 4Q or the first half of next year? Just more of the mechanics there.

Harmit Singh: Yes. So I think, Ike, on the revenue, it is a little lower than the implied guide for Q4 because we guide the following quarter and the full year is largely driven by foreign exchange. So reported, I think consensus is about 4.1% and this implies, I think we're saying 3%. Foreign exchange is a 100 basis point drag from that perspective. So that's your question on revenue. The question on what are we doing in gross margins is largely -- we're doing a couple of things. We're -- we could have taken pricing down. We could have. That was just one of the levers. When the tariffs happened, it was not the only lever in the U.S.

There are a couple of other pieces. But as I said earlier, we looked at the price value. And I think our current prices sustain that long term. And given the environment is a little bit more promotional at this stage, we are really targeting promotions on key holiday moments. I mean that's how we're thinking about it. Think Labor Day with Thanksgiving coming up with holiday, that's where we're thinking about it. To your point about why shouldn't this last? And also, I think Michelle said, we didn't have the right offer in the quarter. So we had to do this.

And so given the fact that we strongly believe working with our product teams and the marketing team that we do have a great offer for holiday. Michelle talked about sweaters and the like, and you will see that in our stores. I think that coupled with our execution, we believe the promotional aspect of our offers will probably not sustain itself. And I think Matt asked the question about gross margin. We feel good at this time, continue to grow gross margins in 2027.

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

Brooke Roach: Harmit, you mentioned 3 areas of reinvestment of the tariff refund supply chain, marketing and sharper value on promotions. Can you quantify the proportion of investment that you're putting towards each bucket? And if any of these investments will lead to payoffs in the business in 2027 and beyond versus the investments that are just driving immediate impacts to your business? And then maybe a follow-up for Michelle. Given the enhanced marketing as a percent of sales this year, how are you thinking philosophically about the opportunity to potentially reinvest at a higher marketing spend rate over the next several years, similar to what we've seen other companies do in the branded space?

Harmit Singh: So to answer your question, Brooke, the simplistic way, let's say we spend -- we redeployed $60 million out of the $80-odd million for tariffs that we received. I would say 1/3 is marketing, 1/3 is distribution and logistics and 1/3 is promotional activities. A little bit, we did clear some inventory just to make sure we are clean and we have inventory for the holiday. That's the simplest way of looking at it. In Q3, the majority was promotions, a little bit of advertising, a little bit of inventory clearance.

In Q4, it's largely advertising, marketing, distribution and slight promotions, not to Ike's question, the activities that -- the promotional activities we ramped up in Q3 are going to be ramped down in Q4, largely because we've got better product and we've got better marketing. Does that answer your question, Brooke?

Brooke Roach: Yes. Helpful.

Michelle Gass: And Brooke, I can take part 2. So I think your question is to me, how should we think about our bridge between, say, Harmit mentioned it earlier, we're at 9% in 2023. We're at, call it, we've just guided around 12%, and we're still committed to the 15%. Our line of sight there is that we see opportunity in driving store 4-wall profitability. We see leverage opportunity based on the volume, how we think about corporate expense and the like. We do see an opportunity for D&L improving over time. We can see it this year. We think it's the peak. So all of those things and a few more, we see as gross margin, another one.

We expect to continue to elevate the brand and get gross margin gains. So those will all be tailwinds between now and put a date out there to get 15%. Along the way, from a marketing standpoint, our intent is over time to invest more in the brand. Now we're at roughly 7%, a little bit more than that. I'm not going to put a precise number. But if we continue to get good returns on marketing, we'll find a way to fund that. So that's how we're thinking about it in the context of our commitment to all of you to get to that 15% EBIT.

So we'll be obviously on our next call talking about how we're thinking about '27 in that context. So stay tuned. And I think that was the last question. So thank you, everyone, for listening. I guess I want to make just one reiteration that as we think about our business heading into the fourth quarter, we've said it already. The trends are positive. DTC is running at least a mid-single-digit rate. We feel confident for the balance of the year and want to wish everyone a great holiday, and we'll see you in January. Thank you.

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