Levi Strauss & Co

NYSE:LEVI

Earnings Call Analysis

Continued Growth in Direct-to-Consumer and Strong Financial Performance Boost Confidence

Levi Strauss & Co. reported another strong quarter with revenues up 9% in constant currency, driven by an 11% increase in direct-to-consumer (DTC) sales. The company saw significant growth in its global Levi’s Women’s business, which was up by 22%. Gross margins reached a record high of 60.5%, and adjusted diluted EPS was $0.16, up $0.12 from the prior year. Project Fuel is on track to deliver $100 million in savings this year. Looking ahead, Levi's expects full-year reported revenues to grow between 1% to 3%, with further improvements in the latter half of the year .

Introduction and Recent Performance

The company experienced another strong quarter with a revenue increase of 9% in constant currency. This performance reflects sequential improvement across the business, instilling confidence for the second half of the year and beyond. The direct-to-consumer (DTC) channel grew 11%, marking nine consecutive quarters of robust growth. The Levi's brand continues to gain momentum, particularly in the Women’s segment which saw a 22% increase in DTC sales.

Segment Highlights

In the Americas, DTC revenues increased by 16%, attributed to double-digit growth in both brick-and-mortar and e-commerce channels. The U.S. market, despite a mid-single digit decline in wholesale, grew low-single digits overall due to strong DTC performance. Europe saw an improvement, with DTC revenues up 7% and wholesale business showing signs of recovery. In Asia, net revenues rose by 6%, with e-commerce and company-operated stores driving growth.

Profitability and Cost Management

Gross margins reached a record 60.5%, driven by lower product costs and a favorable shift towards DTC, offsetting FX headwinds. Adjusted EBIT margin increased by 360 basis points to 6%, as gross profit growth outpaced SG&A expenses. Project Fuel has been instrumental in cost control, aiming to save $100 million this year through workforce reduction, procurement savings, and higher DTC productivity.

Distribution and Logistics Overhaul

The company is transitioning from a primarily owned logistics network to a balanced model including third-party providers. This shift aims to reduce fulfillment costs while freeing up capital for DTC investments. The transition is expected to temporarily increase costs in 2024 but is forecasted to positively impact EPS by $0.02 from 2026 onwards.

Market Responses and Future Initiatives

New product assortments, especially within the Women’s segment, have received strong market responses. The company plans to continue focusing on full-price sales and the DTC channel while leveraging new store openings heavily skewed towards the second half of the year. Strategic partnerships and product innovations, such as new denim styles and expanded non-denim offerings, are set to bolster future growth.

Fiscal 2024 Outlook

For the full year, the company expects reported revenue growth between 1% and 3%, with constant currency revenue trending towards the upper end of this range despite FX headwinds. Full-year gross margins are anticipated to rise by 180 basis points from the prior year, while EPS is projected to be between $1.17 and $1.27. The company remains confident in achieving sequential revenue improvements in the remaining quarters, driven by new product launches, an expanding DTC segment, and the benefit of an additional 53rd week in the fiscal year.

Conclusion

The company remains focused on becoming a best-in-class DTC retailer. With strong brand positioning, operational improvements, and strategic investments, it is well-positioned to continue growing profitably. The combination of innovative product lines, enhanced direct-to-consumer capabilities, and a more efficient logistics network underscores the company’s commitment to long-term sustainable growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's Second Quarter Fiscal 2024 Earnings Conference Call for the period ending May 26, 2024. [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 & Company.

[Aida Orphan, executive]

Thanks, Latif. Thank you for joining us on the call today to discuss the results for our Second Quarter Fiscal 2024. Joining me on today's call are: Michelle Gass, our President and CEO; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q2 financial results in our earnings release on the IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site.

We'd like to remind you that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular, the Risk Factors section of our Form 10-K for the year ended November 26, 2023, for the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today and we assume no obligation to update any of these statements.

During this call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures are not intended to be a substitute for our GAAP results. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today's press release. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable efforts due to the challenge in quantifying various items, including but not limited to the effects of foreign currency fluctuations, taxes and any future restructuring -- restructuring-related severance and other charges.

Finally, this call is being webcast on our IR website and a replay of this call will be available on the website shortly. Please note that Michelle and Harmit will be referencing constant currency numbers unless otherwise noted.

And now I would like to turn the call over to Michelle.

[Michelle Gass, executive]

Thank you, and welcome everyone to today's call. We delivered another strong quarter with revenue up 9% in constant currency and 2% adjusted for the ERP shift and the exit of the Denizen business, reflecting sequential improvement across the business. The ongoing acceleration in the business gives us confidence in the second half of the year and beyond.

Here are a few highlights. We continue to see strong growth in our direct-to-consumer channel up 11%, reflecting 9 consecutive quarters of robust comp growth. The Levi's brand continues to gain momentum, up 2% on an adjusted basis. Our global Levi's Women's business is accelerating and delivered 22% growth in DTC in Q2. Levi's now ranks #1 in Women's denim bottoms in the U.S.

Our largest market, the U.S., once again delivered positive growth for the third consecutive quarter on an adjusted basis. Global wholesale sequentially improved, down 4% on an adjusted basis due to an improvement in sell-out trends. While we are driving this growth, we are also improving our profitability as evidenced by record gross margins of 60.5%, enabling us to deliver a higher-than-expected adjusted diluted EPS of $0.16.

As I've shared previously, we are currently undergoing a significant transformational pivot to become a best-in-class direct-to-consumer retailer. While this evolution will span multiple years, our efforts are already positively impacting our quarterly results. I will now talk you through the details of the quarter in the context of our strategic priorities, leading with our brand, operating as a direct-to-consumer first business and powering our portfolio.

Starting with leading with the Levi's brand. A key indicator of brand health, we continue to make meaningful market share gains in the U.S., driving growth with Women and our key youth target group of 18- to 30-year olds, while maintaining our dominant leadership position in Men's. Importantly, we have maintained our leadership position across consumers of all ages, and our unaided brand awareness remains well above our competition across most markets globally. We continue to drive brand heat and impactful storytelling by showing up at the center of culture across music, art and design, fashion and sports. We were thrilled and honored to have Beyonce name a song after us on her newest album. And as an example of our agility, we responded to the speed of culture, not only demonstrating our understanding of engaging social communities in an authentic way, but also generating more than 3 billion impressions and a ton of buzz for the brand that remains today.

We activated in a big way at Coachella and Stagecoach music festivals and launched collaborations with ERL, Stussy and Starter. As we look to the second half of the year, we have a number of impactful partnerships planned across the globe, including a Paris-themed collaboration with renowned label [ Pagal. ] This is also in support of our key city strategy, amplifying our efforts in Paris through initiatives like the opening of our iconic Champs-Elysees store in the second quarter and our fifth House of Strauss.

Moving to product. We saw strong performance in our core offerings while also introducing newness and innovation in denim and beyond as we expand our total addressable market. We continue to lead the global trend around straight, loose and wide leg bottoms, now comprising more than 50% of our overall bottoms assortment, loose fits grew 21% across channels in Q2. We are continuing to lean into the trend this summer with the launch of a new baggy fit for women, the XL, which will be available globally and across channels, along with a new relaxed fit for men, the 555.

The core of our business remains very healthy. Our original icon, the 501, continues to deliver impressive growth, up 16% in DTC in Q2. Our strategic focus around denim dressing continues to gain traction is becoming a more meaningful part of our portfolio and is expanding our total addressable market opportunity. Denim dressing continues to perform very well with denim dresses, skirts and jumpsuits, again up triple digits in the quarter. We're also seeing success in tops and non-denim categories, evidence that our tops reset and increased focus on denim lifestyle are working.

Tops were up 20% in our DTC channel for Q2 with even stronger growth in women's tops, driven by our elevated essential offerings in woven tops and non-graphic tees. The growing popularity of Western wear is at an all-time high, and our fans continue to choose from our collection of timeless yet fresh Western-inspired pieces. This includes our iconic Western shirts, which are seeing particularly strong sales in Women's up 40%.

Relative to non-denim bottoms, our recently introduced Tech pant and the 511 fit for men is delivering strong results. We see this as a new and expanding innovation platform, driving incremental wear occasions for our consumers. Given our early success, we'll be introducing a range of new products over the coming year with the next introduction being the XX Chino available worldwide and across both our wholesale and DTC channels.

Looking to the second half of 2024, we will continue to deliver newness and drive innovation. For women, we have a strong lineup that supports our denim dressing and denim lifestyle strategy including skirts, dresses and jackets. We are also expanding into key categories like outerwear and sweaters to drive the head-to-toe offering. And following the success of our Performance Cool product, which we broadly rolled out globally earlier this year, this fall we are set to expand the innovative platform with the launch of Performance Warm, made with a soft interior that is designed for warmth and cooler weather.

Looking ahead, we are making great progress on our efforts to streamline our go-to-market calendar by reducing SKUs by at least 15% and addressing complexity in our process, which will start benefiting us in H1 '25. The team is already using some of the learnings to create more agility in our process, such as chasing into top sellers this season. As we shorten our timelines and operate with a tighter assortment, we will see a number of benefits including responding faster to consumer trends and enhancing our overall efficiency as a DTC-driven organization.

Now let's shift to direct-to-consumer, our next strategic priority and one of the biggest unlocks as we pivot to become a best-in-class omnichannel retailer. DTC continued to grow rapidly, up 11% on top of 14% growth in the prior year. We achieved these strong results by delivering high single-digit positive comp growth.

As I shared on our last call, we've been laser-focused on driving profitability and productivity in our stores. This quarter, we saw an improvement across all store KPIs, led by higher UPT and better conversion driven by our new product introductions, an improvement in our in-stock position and a continued focus on best-in-class engagement with fans in our stores.

U.S. DTC was up 12%, led by our mainline stores. AURs and mainline were up low single digits as consumers gravitate toward our full price premium products. Globally, we continue to execute our retail expansion plans and are on track to open 100 net new doors this year. In Q2, we opened our largest store in Thailand at the Central World Mall in Bangkok. This store is a pilot where we're implementing learnings from consumer research to improve the in-store consumer journey. By applying changes like displaying our denim lifestyle categories more visibly throughout the store and elevating our premium collections, we drove revenue growth in both tops and bottoms. Results are encouraging, and this is just one example of the great potential we have in improving store productivity.

E-commerce continues to be a big opportunity for us, up 19% this quarter, led by double-digit growth in the U.S., where we are seeing strong full price sell-through and strength in Women's now comprising more than 50% of the business in this channel. Ongoing initiatives to elevate our site and enhance the consumer experience as well as deliver a more premium and expanded assortment, continue to drive our momentum across all of our markets. We also drove meaningful growth in our loyalty program, acquiring almost 2 million members in Q2 with 36 million members globally.

As we make our pivot to be a DTC-first company, we also remain committed to wholesale. On an adjusted basis, our global wholesale business was down 4%, in line with our expectations and a sequential improvement to Q1. We feel good about the trends we're seeing in our global wholesale business overall. The actions we've taken to stabilize this business are working. Sell-out trends are improving, including in the U.S. and Europe, and customers are excited about our expanded assortments. Importantly, this channel is significantly more profitable than last year, amplified by our healthier inventory levels and the improvement in our supply chain operations.

Turning now to our third strategy, powering the portfolio. Our international business is becoming a more meaningful contributor to our business and grew low single digits in the quarter. This reflects 6% growth in Asia on top of 27% growth in the prior year, bolstered by strength in Japan, India and Turkey. And our Europe business sequentially improved, down low single digits in the quarter with certain key markets, including Italy and Spain, positive in the quarter as well as an improvement in performance across both wholesale and DTC.

Dockers was down 1% on an adjusted basis coming in below our expectations. Profit exceeded prior year led by gross margin expansion and disciplined expense management and inventories are significantly below prior year, down 16%. Going forward, we'll be leaning into innovation with an expanded head-to-toe collection of the performance-based Dockers Go series, which has exceeded expectations since its launch.

Beyond Yoga was up 13% an acceleration to Q1, driven by strength in wholesale and e-commerce. In the quarter, we continued to see success in our much-loved Core Space Dye business as well as wins in new lifestyle categories like wider leg pants and dresses. Our new CEO, Beyond Yoga, Nancy Green, has moved quickly to bring in seasoned industry leaders in product development, sourcing, retail, e-commerce and marketing to build the capabilities to rapidly scale this business and achieve the long-term potential of the brand.

To conclude, we are pleased with our performance through the first half of 2024, which underscores that we have the right strategies in place to drive long-term sustainable and profitable growth. The Levi's brand has never been stronger. We continue to gain market share and our amplified focus with women and younger consumers is working. We have momentum across the world, including the U.S., where we have delivered 3 consecutive quarters of positive performance. We are seeing a strong response to our innovation and product launches centered around owning denim lifestyle and have a robust pipeline for the remainder of the year.

Our transformational pivot to operating as a DTC-first company is reaching a tipping point with accelerating sales momentum and an improvement in margins. And we have an incredible, talented and passionate team around the world that is driving this transformation and delivering outstanding service with our consumers every day. All of this gives me great confidence for the rest of the year and beyond.

And with that, I'll now turn it over to Harmit to cover the financials.

[Harmit Singh, executive]

Thanks, Michelle. We are pleased to have delivered earnings that significantly exceeded expectations despite stronger-than-expected headwinds from FX and a higher tax rate versus the prior year. Gross profit dollars grew twice as fast as SG&A dollars, reflecting both revenue and gross margin growth, but also our relative expense discipline, driving higher operating margins. Going forward, this is a key metric we are focused on to enable us to achieve our longer-term goal of 15% high-quality margins.

Our DTC business continues to not only be our fastest-growing business, but is also seeing real improvements in profitability with operating margins increasing more than 300 basis points during the quarter. This includes a significant improvement in e-commerce profitability, with EBIT margins now double digits on a fully-allocated basis. The improvement in profitability in our DTC business surpassed our own expectations. And we believe we will continue to grow profitability in this channel as we pivot to a DTC-first company.

And as our wholesale business becomes a smaller piece of our overall business, as Michele mentioned, it is more profitable as inventory levels have normalized and gross margins across the business have increased, which we are focused on sustaining. The benefits from Project Fuel are progressing as planned, and we believe our strategies related to this initiative are working. We remain on track to deliver $100 million in savings this year through a workforce reduction that has largely been implemented. Savings from indirect procurement that are in progress and higher productivity from our DTC business, which is evident from our recent results.

We also believe there will be additional savings in 2025, which we intend to quantify when we guide next year. In the quarter, we continue to make improvements in reducing our inventory position. And along with working capital management, we have generated positive free cash flow of $223 million in the second quarter and $437 million year-to-date. Shareholder returns in the quarter were up 36% as we bought back shares and paid dividends. Reflecting our confidence in our cash flow position, we are increasing the quarterly dividend by 8% to $0.13 in quarter 3, making this the first increase in dividends since July of 2022. And with that, I will turn to our results.

Q2 net revenues were $1.4 billion, reflecting continued momentum in our global direct-to-consumer channel, which grew 11% and up 26% on a 2-year stack. Along with our franchise partners, we have opened 30 net new doors in H1, excluding the Columbia takeback. Together, our DTC and franchise business comprised 54% of total net revenues. We remain on track to open a net of 70 stores in H2, ending the year with a system-wide store count of more than 2,600.

Gross margin of 60.5% was a record high and improved 180 basis points year-over-year. Expansion was primarily driven by lower product costs, the structural shift to DTC and the faster growth from our Women's business, all coming in higher than our expectations. These factors offset over 100 basis points of FX headwinds.

Adjusted SG&A expenses in the quarter increased 4.3% to $785 million, and as a percentage of sales, adjusted SG&A was 54.4%, 190 basis points lower than last year. The SG&A leverage was slightly better than our expectations as we began to see the benefits of our cost control actions and our global productivity initiative, Project Fuel. The increase in S&A dollars was primarily related to additional incentive accrual in quarter 2, '24 versus last year.

Gross profit dollars increased by 11% and grew at twice the pace of SG&A dollars, leading to EBIT leverage with adjusted EBIT margin increasing 360 basis points to 6%. Adjusted EBIT dollars also significantly increased versus last year. On an H1 basis, gross profit dollars also grew at a faster pace than SG&A dollars, driving an increase in adjusted EBIT margin of 40 basis points. Adjusted diluted EPS was $0.16, up $0.12 from prior year, significantly exceeding our expectations.

Reported inventory dollars were down 19%, excluding the impact of the modification of terms with the majority of our suppliers. This reduction was better than our plan. And overall, inventory is expected to end the year below prior year levels as we work to further optimize inventories. As part of Project Fuel, we are focused on getting inventory turns back to 3 over time as we drive assortment productivity. This will release significant working capital.

Let me take a moment to talk to you about the significant changes we are making to our global distribution and logistics strategy. We have made the decision to move from a primarily owned and operated distribution and logistics network in the U.S. and Europe, to one that will be more balanced between our own and leading third-party logistic providers.

As we continue our pivot to a DTC-first company, our distribution network needs investment, including upgrading existing capacity with omnichannel capabilities. Our new strategy allows us to secure these investments in a capital-efficient manner by leveraging third-party capital, while freeing up our own resources to invest in growing the direct-to-consumer channel. This will also enable us to reduce our fulfillment cost per unit compared to running the facilities ourselves, while immediately delivering a cash infusion of over $90 million this year, primarily as a reimbursement of the capital spend to build our new distribution center in Germany.

In the near term, these changes require the parallel operation of new and old facilities for the rest of 2024, resulting in a transitory increase in distribution costs with a negative $0.02 impact to EPS in 2024. We expect we will begin to see a favorable $0.02 impact to EPS in 2026, which will progressively increase in '27 and beyond, as distribution costs come down and inventory efficiencies improve as we better service our omnichannel needs.

Now, let's review the key highlights by segment.

In the Americas, DTC revenues were up 16%, driven by double-digit growth in brick-and-mortar and e-commerce. While U.S. wholesale was down mid-single digits, the U.S. market grew low-single digits entirely as a result of DTC growth on an adjusted basis. We are also seeing meaningful improvements in profitability across both channels. Robust gross margins driven by favorable brand and channel mix and reduced product costs resulted in strong operating margins of 18%. Notably, our gross profit dollars grew significantly faster than our SG&A expenses.

In Europe, DTC revenues increased 7%, a sequential improvement to Q1, reflecting growth in mainline, outlet and e-commerce. Wholesale, while down 11% has improved versus last quarter. Given the continued strength in DTC and the sequential improvement in wholesale, we continue to expect Europe to return to growth in H2 with a prebook in Europe up mid-single digits for the second half. In the quarter, gross margins were up 420 basis points, offset by SG&A investments resulting in a 15% operating margin, which was flat to last year.

Asia net revenues increased 6% compared to the prior year and are up 34% on a 2-year stack. DTC revenues increased 6%, driven by strength in e-commerce and company-operated stores and wholesale net revenues were up 5%. China, while lapping 95% growth in the prior year from the COVID reopening, was down by 10%. We have recently enhanced our locally relevant product assortments and believe this should help improve the business. Excluding China, Asia was up 9%, driven by growth across most markets. Overall for the quarter, Asia delivered an operating margin of 13%, which is 70 basis points higher than prior year, largely driven by gross margin expansion.

Now let's turn to our fiscal '24 outlook, and I will also share color on the next 2 quarters. Sales trends were consistent each month in the quarter, and we saw strength in several key drivers of our business, including the U.S. market, acceleration of our global DTC business from last quarter and robust growth in Women. However, despite the supportive trends, headwinds from foreign exchange have recently increased, especially with the Euro and Mexican Peso, creating a wider divergence between reported and constant currency performance, with a more meaningful impact in quarter 3. As a result of the FX impact on our business for the full year, we now expect full year reported revenues to be at the midpoint of our range of 1% to 3% year-over-year growth with revenue in constant currency trending closer to the upper end of our range.

As respect to gross margin, we now expect the full year to be up 180 basis points to prior year, 30 basis points higher than our previously guided range despite incremental FX headwinds of approximately 20 basis points for the year. This will be offset by an increase in SG&A due to the transition in our logistics and distribution network I spoke to earlier, and a slight increase in advertising as we continue to fuel the momentum of our business. Additionally, we reiterate our expectation for approximately $15 million a quarter in interest and a mid- to high-teens tax rate.

As respect to earnings, we are making long-term investments in the business with our distribution and logistics transition as well as our brands with an increase in marketing. We expect these investments will impact full year EPS by $0.03. We also expect the impact of FX to be an incremental $0.02 headwind for the year. Given these factors, despite the beat in Q2, we are maintaining our adjusted diluted EPS estimate of $1.17 to $1.27 for the year at this time.

Let me give you a bit more color on the back half of the year. In Q3, we expect continued sequential improvement in revenues, with reported revenues up low-single digits and low- to mid-single digits on a constant currency basis. This is inclusive of a currency headwind of over 100 basis points. Revenue growth in quarter 4 will inflect upward to mid- to high-single digits on both a reported and constant currency basis, including a 60 basis point headwind from FX. The improvement in Q4 versus Q3 is driven by the fact that the majority of store openings are skewed to the fourth quarter, and there is the benefit of the 53rd week.

In the third quarter, gross margin will accelerate and be up approximately 200 basis points to prior year as we will have fully anniversaried the pricing actions we took last year with the benefits of product costs, higher DTC and Women's continuing. We also expect a mid-single digit increase to SG&A due to the continued expansion of DTC, higher A&P and incentive funding compared to prior year, as well as incremental costs related to our distribution transition, partially offset by savings from Project Fuel. We are confident that the acceleration in sales and profitability from Q1 to Q2 versus prior year will continue into the second half of the year.

Our confidence is rooted in several factors. First, we are seeing a strong response to our new product assortment and more exciting launches set for the second half. We also focused on full price sales, particularly in our mainland stores in the U.S. as we continue to introduce new products. Second, we continue to see momentum in our DTC business. And as I mentioned, store openings are skewed to H2 when 70% of our net new doors are slated to open. Third, we are confident in the continued strength of our U.S. business and Europe overall is poised to return to growth in H2, supported by a positive wholesale prebook and continued strength in DTC. Fourth, as we become a more DTC-focused retailer, we are confident in our plans for back-to-school and a holiday product and marketing campaign. The benefit of the 53rd week contributes approximately 1 point to H2 and 2 points to quarter 4. And as we think about the profitability improvements in H2, our gross profit dollars are expected to grow 2x the pace of SG&A dollar growth.

To close, we delivered on our commitments and saw solid results in H1. The strategic and financial benefits of our shift to DTC are getting us closer to the consumer and along with a smaller yet more profitable wholesale business, is improving the structural economics of the company. We continue to be confident in the acceleration in revenue, profitability and free cash flow while taking some tough, but transformative actions to become a best-in-class omnichannel DTC-first retailer.

And with that, I will go ahead and open up the line for Q&A.

[Operator]

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

[Laurent Vasilescu, analyst]

Michelle, Harmit, can you maybe talk about your confidence in the 2H acceleration for the top line? I believe you talked about European order books up mid-single digits for 2H. How should we think about overall wholesale for 2H? And any further color, Michelle, on Europe and what you're seeing in terms of the trends so far?

[Harmit Singh, executive]

Laurent, let me take the confidence second half and the acceleration, and then I'll pass on the wholesale including U.S. to Michelle. But as you probably heard, we are confident about the acceleration, both top line and bottom line in the second half. So to think about it simply, the trends that we've seen, the sequential improvement we have seen in the first half continue into the second half and get better.

Get better driven by the following: one, Michelle talked about the wonderful product lineup that we have and the exciting launches in the second half. We have launched a lot of these products in the U.S. We're going to scale it and started with DTC, scaling it into wholesale and scaling it globally. And that's why we're really confident about the back-to-school and the holiday product launches we have. DTC is really strong. Productivity and profitability in DTC is really improving. And then we've got these extra stores that we are building in the second half. So that really would help our DTC business.

The U.S. business has 3 consecutive quarters of growth that we expect to continue into the second half. Europe is sequentially improving, but we feel really good about Europe returning to growth in the second half. The prebook is up mid-single digit and DTC will continue in the strength that we're seeing. There is the benefit of the 53rd week, both in H2 and quarter 4.

And then on profitability, it's really driven by broadly 3 factors. The first is, as revenue accelerates, [ we'll ] flow through that because we're really focused on gross profit dollars, driving -- being higher than SG&A dollars driving EBIT leverage. Fuel savings just begun in Q2. I think we have Fuel savings of approximately $20 million. The rest of that coming in the second half through the initiatives that we talked about. And then continued progression on the gross margin expansion that we talked about. So that's what really drives profitability.

On wholesale over to you, Michelle.

[Michelle Gass, executive]

Yes. Not a whole lot to add. But just to chime in on your question around the wholesale channel, so global wholesale. We're pleased, and we're seeing sequential improvement in our wholesale business globally, of course, in particular, in our 2 biggest wholesale businesses in the U.S. and in Europe. We were down 4%, which was up versus Q1, and we're expecting that progressive improvement to continue into the back half. It's really all the strategies that we've put in place over the last year that are gaining traction.

It starts with product. Harmit just mentioned that. But we really are leading the trend with product, and that's fueling our DTC business, but it's also fueling our wholesale business. So it starts with denim bottoms and denim authority around the whole trend on baggy loose wide leg, that's resonating. Our key customers are excited. They're ordering it and consumers are responding. And our sell-out trends are improving across our wholesale channel. So we're -- that's a leading indicator. So we're really encouraged by that.

Second, I would say our strategy around denim lifestyle and in particular with women, we're seeing outsized growth there. So tops, bottoms, denim dresses, denim skirts working in DTC, also working in wholesale. And then I would add, as it relates to our supply chain, which was a challenge for us, as you know, last year in the U.S., that's all behind us. So when you take all those factors, we are in a completely different and better place than we were a year ago as it relates to global wholesale, both Europe and U.S.

And then as it relates to your question on Europe, just to take that question home, we saw a big improvement from Q1 into Q2. So we were down to DTC up 7%. And we are fully expecting to see Europe grow in the back half of the year with DTC continuing to accelerate, already positive, continue positive and seeing significant gains in wholesale as well with the indicator being that the prebooks are up. So all in all, on both fronts, both wholesale and Europe, we're optimistic in the back half, and that's all baked into the acceleration we have planned in H2.

[Operator]

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

[Robert Drbul, analyst]

Just 2 questions, I think, a little bit of a follow-up. But just in terms of the U.S. business, can you talk a little more around what you're seeing from the consumer, both our male and female consumers? And ultimately, when you look at some of the trends within the denim businesses, Michele, do you see momentum continuing with some of the bigger drivers in product?

[Michelle Gass, executive]

Yes. Thanks, Bob, for the question. So a few questions within that. First of all, as it relates to our U.S. business, we're very pleased. We're feeling really good third quarter of positive growth. I mean, we really think about -- and Harmit mentioned this in his remarks, but we really think about the U.S. as a total marketplace. Our DTC business is growing tremendously. It was up 12% in the quarter, and that was driven off of -- to your question on trends, that was largely driven off of Women. Men's still healthy in the mid-single digits, but Women's was up over 20% across both bottoms and tops. And in fact, as it relates to the U.S. market, market share, which is really a powerful indicator.

We -- I mentioned earlier in the call, but I'll say it again, #1 market share leader in Women's denim bottoms. And we have now created great separation in that position. So feeling great about that. Men's continues to hold the #1 position, gaining market share as well with that younger consumer. So really encouraging leading indicators as it relates to the U.S. market. So I feel good about that. And as I just mentioned, DTC is our primary growth driver, but we are feeling very good about the trends we're seeing in the U.S. wholesale business as well.

And then to your question on state of the consumer and based on our business, we're feeling good. I mean our consumer is proving to be resilient. They're coming into our stores, they're shopping online. So are indications, I mean, we control what we control. And certainly, there's some level of uncertainty as we look into the back half of the year and beyond. We're always certain about that uncertainty. But we control what we can control. And our responsibility as the denim category leader is to drive that innovation, drive that freshness and newness. We're doing that in bottoms with these trends, I was speaking to the looser, baggier trends, but we're also now doing it on head-to-toe denim lifestyle, which is a newer strategy for us, and it's working.

I mean, denim product beyond bottoms, is selling like crazy. I mean, Western shirts, and I know Western is trending as well as it relates to trends in the denim market up 40%. Denim skirts and dresses, those were up triple digits. And I would say on all of this, Bob, we're just getting started. So we will continue to fuel excitement in the category for kind of months and years to come.

[Operator]

Our next question comes from the line of Matthew Boss of JP Morgan.

[Matthew Boss, analyst]

Michelle, on the total addressable market, which you touched on in the prepared remarks, could you elaborate on assortment changes that you've made so far that support an expanded TAM for the Levi brand? Opportunities you're excited about to drive greater share of wallet?

And then Harmit, could you just maybe break down gross margin puts and takes that we should consider for the back half of the year relative to the distribution and logistics headwind?

[Harmit Singh, executive]

Sure.

[Michelle Gass, executive]

Sure. Thanks, Matt. Yes. Great question and one that we're quite bullish on actually. So as I did mention, we are expanding our total addressable market. And I'd say in a couple of ways. First, kind of build on the last question, is really this whole head-to-toe denim dressing and then denim lifestyle. So all things denim, I mean, believe it or not, historically, we've been a small player and even things like denim skirts, denim tops, denim jackets, denim dresses and the like. And early indications are super positive. I mean, we have a big opportunity there, and I'm really excited about what's in the pipeline. So that'd be point #1.

And then point #2 is non-denim. When you actually look at our total business, 44% of our direct-to-consumer business is actually now what we consider non-denim bottoms. So that does include kind of the skirts and dresses I was mentioning, but it also includes non-denim in both Men and Women, and we've driven a lot of newness in those categories as well. So our XX Chino platform, which has done really well over the last couple of years, we're expanding that into performance. So you may recall, we launched a new platform, the Performance platform, Performance Tech just recently, last couple of months, we started with the 511 fit for men.

We're launching it into XX Chino in the coming year. That's soon to land actually in the U.S. across channels. And we're working on a more premium offering. That's going to go global. And we're actually looking at expanding the platform from there. So we -- Levi's definitely has permission, but it will always stay true to -- and I think this is really important, to the true Levi's DNA, the aesthetic of the brand. But the consumer is saying both Men and Women, they want more Levi's in their closet. So whether, again, that's more denim lifestyle head-to-toe or more of this non-denim, it's working. And we're seeing it in the numbers.

So we're seeing it in terms of gaining share in Women, significant share, and with Men holding our share but we're also gaining share in non-denim casual pants in Men. So all good indicators. We're excited, and that gives us a much bigger playing field.

[Harmit Singh, executive]

And Matt, on the question of gross margin, so let's talk quarter 2 first, and I'll just give you the second half of the year. And I'll talk about this new focus on gross profit dollars less SG&A. But basically, in quarter 2, the big buckets, the tailwinds were really product costs really driven by commodities. That was approximately 250 basis points higher than a year ago. And the mix on areas that we are driving growth in. So think DTC, think Women's and think Internationals. So that's about 50 basis points.

It was offset by over 100 basis points, as I said in the remarks on FX. And then about 20 basis points in air freight, given some of the Red Sea issues that we're seeing and the fact that we are actually chasing into product and believe it or not, some of the product offers are selling so quickly that we started chasing into it. So we are fighting a little bit more. So that's really the quarter 2.

As you think about the second half of the year, and quarter 3 is a little different than quarter 4, and I'll explain to you in a minute why. But overall, I think tailwinds will be product costs more in quarter 3 because we started lapping this in -- late in Q3. So a little bit in Q3 last year, and you saw the benefit Q4. The mix benefit continues.

And then FX headwind is not as high as 100 in Q2, but probably 50-odd basis points in Q3, substantially less in Q4. Air freight as a headwind, probably the same, especially as chasing into stuff. So generally feeling very good about gross margins, and that's why we raised the guidance for the year, which -- if we deliver we're confident of, will be another record on an annual basis from that perspective. But overall, as we get to the operating margin goal of 15%, [ just as ] metric of gross profit dollars less SG&A, and ensuring that drives the leverage is important. If you go back to 2021, when our operating margins were over 12%, gross profit was growing at a much faster clip than SG&A. And that's the discipline that we as a leadership team want to instill in ourselves.

[Operator]

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

[Irwin Boruchow, analyst]

I guess what I wanted to ask is I'm trying to understand the momentum in the business in certain parts of the categories you guys sell, it seems pretty apparent and there are certain parts of the assortment that seem to be doing extraordinarily well. But just when you look at the overall revenue of the business, it's still not -- it doesn't quite connect with the optimism that you guys have. Now the direct-to-consumer business is very strong, but it's also -- it was similar last year. So I guess where I'm going with that is, is that a function of there's more to come, the inventories are too tight, the wholesaler partners haven't been willing to take product, it takes more time? Because I'm just trying to understand that, there seems to be so much buzz that's growing. I just -- I would have thought there would be more revenue growth commensurate with that. So I guess maybe for Michelle, can you kind of connect those dots for me?

[Harmit Singh, executive]

Yes. Let me take a stab. And so sequentially, quarter 2, hopefully, the ERP noise is behind us. But sequentially, quarter 2 grew 2% constant currency and similarly on Levi's. I just think, as you think about the quarter, Ike, because your question is a good question. I think in the quarter, Levi's generally was on our expectation. U.S. was stronger, Europe was on plan. Asia is slightly lower, largely because of China. Ex-China, Asia was fairly strong. The thing that -- I think the headwinds I talked about a little on the script, but the headwinds were really FX, okay? and Dockers underperformed. So as you think about -- because I think your question is more centered around Levi's, but that's really what happened in the quarter.

Now what gives us real confidence in the second half because revenue does accelerate, especially in constant currency, is the new product offers that just in a global business, you get the best bang for the buck when it's across channels and it's across geographies. And our product is right now making the transition across geographies and across channels. So that's where you're seeing the sequential or our expectation that sequentially, it will improve, just takes a little time from that perspective.

The DTC business continues to grow. Michelle talked about, wholesale. Wholesale was down, granted in Q4, but it's less down than Q1 globally. And our expectation is that, that improves as the year progresses. And it's largely driven by 2 things. Inventory levels generally in the trade are getting to a good spot. So that should open the open-to-buy. And as they see new product, there is -- customers are gearing to put that on the floor. So that's why I think it's a natural progression. And sometimes, it just takes a little time, and that's what we're beginning to see.

[Michelle Gass, executive]

Yes. The only thing I would add, Ike to that is when you kind of take a step back, I mean, as we look to the back half of the year, we are planning for and we've guided for acceleration. So we're expecting the back half of the year to be in the mid-single digits in terms of growth, which bakes in the continued double-digit performance in DTC as well as some modest improvement in wholesale. But our DTC business now is becoming such a big part of our business, as long as we get, call it, stability in the wholesale channel and the kind of -- the kind of growth or stability we're seeing now, the model works. And so that's why we're extremely confident in the back half of the year.

And I think Harmit did a great job explaining this current quarter. The FX piece clearly was the biggest impact, given that 60% of our business is global. But the Levi's brand and the Levi's business is extremely healthy as evidenced by the market share gains that we're making in many places around the world, including here in the U.S.

[Operator]

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

[Dana Telsey, analyst]

As you think about top line and then managing it with the better-than-expected gross margins and your guide for the SG&A, unpacking the increased marketing spend that's happening in the second half of the year, how much higher is this marketing spend than your original plan? And given the positive reception to the trends and that you're the market share leader, how should we think about marketing expense going forward? What do you need in top line sales to leverage some of these expenses in other words?

[Harmit Singh, executive]

Yes. Thanks, Dana. I wish we could have flowed the EPS beat of $0.05, which I think a lot of people were expecting. But as we think about this business, you have to think about this business longer term. So if you think of the $0.05, $0.02 of the $0.05 is really being spent as we make the pivot to more of a hybrid distribution and logistics network. And we did get the cash infusion of over $75 million in the quarter, by about $90 million in the year. And that's just running 2 DTCs parallely as they transition. And that's $0.01 in quarter 3 and maybe $0.01 in quarter 4.

The marketing question, Dana, is about $0.01 higher in H2. And just to fuel the -- we have -- we're expanding the TAM, as Matthew asked. We are introducing new products. Our consumers need to be more aware of it. So we have to drive awareness. And we have wonderful marketing programs that Kenny, I think, talked about in quarter 2. And so this just helps fuel the brand momentum.

To your question about what's the right spend, we do an ROI analysis. And so, as long as we think it really drives revenue, marketing spend will probably end the year around 7%. It's a little over than what we thought, last time we talked about it. But it'll probably grow over time, but so will revenue. And so that's really the linkage we look at.

[Operator]

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

[Christopher Nardone, analyst]

Just a couple of follow-ups on U.S. -- on the U.S. business. Can you elaborate on the progression of U.S. DTC results through the quarter and comment on [ what other ] that sustained in June? And then on the U.S. wholesale business, are you committed to growing the U.S. wholesale business in the back half? And curious if you have any comments on how sell-out is trending versus maybe last quarter?

[Harmit Singh, executive]

Yes. So to your question about the U.S. DTC, it's actually the quarter was fairly even. We saw the U.S. DTC business start really strongly at the beginning of the year, that's continued into the quarter, and we feel really good about the continuation into quarter 3. The U.S. team is doing a phenomenal job, really making this pivot to DTC and driving productivity. The EBIT margins are off the charts, as an example. We don't talk about it by segment. But if you look at the Americas operating margins, the large piece of that is driven by our DTC business.

To your question about U.S. wholesale, it gets better from the mid-single-digit decline that we talked about as the year progresses. Very difficult to predict whether it turns positive. The thing that we can say, I think, Michelle, with confidence is we are seeing sell-throughs actually improve as we exited the quarter. And so that does bodes well. And inventory levels are relatively lean. So the combination of that, especially as the U.S. consumer, which is -- who we think is resilient, I think you can do the math over time.

[Michelle Gass, executive]

Yes. Maybe the only thing to add on that one, Harmit well said, is that -- just to make the point, when we think about the state of the U.S. wholesale business a year ago versus where we are today, it literally is a sea change of what we're seeing in U.S. wholesale from the operations supply chain. We're back to normal. We're shipping orders, and we had a little bit of catch up. Now it's kind of, call it, business as usual. Product, the center of everything, the product is resonating, I think, especially with as we look to our denim lifestyle strategy, Women's tops, those are all outperforming.

As we talked about, the sell-out trends are improving in U.S. wholesale. We're working closely with all of our key customers so that the brand is showing up in a way that's a win-win for us and for them. So all the -- really all the core strategies that we put in place a year ago to turn this business around is working, and we've now seen several quarters of improvement versus where we were a year ago.

[Harmit Singh, executive]

Yes. And I've been reminded to say this as well, which is our full year guidance is not contingent on U.S. wholesale growing in the second half. I just want to make that point, Chris. And you didn't ask this, but U.S. wholesale is a lot more profitable today than it was a year ago.

[Operator]

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

[Michelle Gass, executive]

Latif, we can go ahead...

[Harmit Singh, executive]

Yes. And maybe a logistic issue, Latif, we'll catch up with Oliver later.

[Operator]

Okay. We'll go to the next question, which comes from the line of Paul Lejuez of Citi.

[Paul Lejuez, analyst]

I'm curious if you can talk about the drivers of the DTC increases in each of your regions just in terms of square footage increases versus comps, but also units versus pricing?

And then as a follow-up to that, curious if you changed your expectations at all for the second half for DTC in any of the regions based on what you saw in 2Q or the first half in general?

[Harmit Singh, executive]

Yes, Paul, I'll be brief. Comp sales were a big driver of the DTC piece. Our units as in terms of new doors, net new doors was modest in the first half. So that will pick up in the second half. And while we talk about stores and we talk about comps, our e-commerce business is on fire. The e-commerce team led by Jason, they're doing a phenomenal job. And it's really going back to the basics, driving loyalty, driving higher conversion, et cetera, fixing the fundamentals. So I think that's where you -- we never talked about it, but as you heard in the call, the e-commerce profitability is up to low-double digits, and that's a big thing.

To your question about DTC productivity and DTC EBIT margins of 300 basis points. I'd say half gross margin, half rails productivity, which is driven by 2 things. One is better labor management and better our revenue leverage. Those are the 2 things. And in both cases, I think we're just getting started. We think there's a lot more opportunity on driving productivity and narrowing the gap between the wholesale EBIT margin and the DTC EBIT margin because that will really help us get to the 15% operating margin.

[Paul Lejuez, analyst]

Harmit, how much of this pricing driver in each region?

[Harmit Singh, executive]

Yes. Price was modest, I would say, Paul. In the U.S. it's very modest. We took some reductions last year, we have not taken more. AURs -- as it becomes more of a DTC business, AURs are up largely in our mainline stores. They are full price stores across the 3 regions. A little bit of pricing in Asia. Very modest -- I mean, I think, very little pricing in Europe.

[Michelle Gass, executive]

No, And I would just build on that, Harmit, and say any AUR increases that we're seeing is coming off of mix-shift as our consumers buy more elevated premium product. I mean, as we bring in a lot of these fashion fits, the looser, the low waist, baggy, we're able to price up. But I mean, to your point, this volume -- the sales that's generated is generated off of volume, the velocity of our business.

[Operator]

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

[Michelle Gass, executive]

Just appreciate everybody joining the call. Thanks for the great engagement and questions. We look forward to connecting with you next quarter.

[Operator]

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