Levi Strauss & Co. earnings

Management highlights

### Core Financial Performance - Organic net revenue grew 6% year-over-year, reported net revenue up 8%; gross margin expanded 10 basis points to 62.7%, with lower product costs and pricing as tailwinds, offset partially by tariffs and foreign exchange headwinds. - Adjusted SG&A grew 6.5% year-over-year, but leveraged 80 basis points as a percentage of revenue, reflecting disciplined cost management. Adjusted EBIT margin expanded 70 basis points to 9%, and adjusted free cash flow grew nearly 60% year-over-year to $231 million. ### Brand & Marketing Strategy - Continued global rollout of the *Behind Every Original* campaign, launched at the 2026 Super Bowl, featuring a mix of global and local cultural influencers across music, sport, and fashion to drive local relevance in key markets. - Turned a branding restriction at the Global Soccer Championship held at Levi's Stadium into a viral marketing campaign, which became the most viewed, shared, and commented post in Levi's history, generating approximately 1 billion press impressions. - Activated a collaboration with K-pop brand ambassador Rosie via pop-up shops in key Asian markets to accelerate women's business growth in the region. ### Product & Category Expansion - Denim bottoms grew 6%, with strong performance across both core traditional fits and new looser silhouettes (including 501 90s for her and 501 loose for him as standouts). - Expansion into non-denim categories contributed roughly one-third of top line growth in the quarter, expanding total addressable market: shorts grew 11%, women's white denim grew 70%, tops grew 5% (7% excluding the prior year European distribution center impact), with newer categories (blouses, wovens, sweaters, polos) outperforming mature legacy categories like graphic tees. - BlueTab, the brand's premium denim line, continues to gain traction, driving early share gains in the under-penetrated premium segment for Levi's, with 40% year-to-date growth. - Women's category grew 11% overall, outpacing men's growth and extending Levi's leading market share position in both men's and women's denim. ### Channel Strategy - Global DTC revenue grew 8% and comprised 51% of total company revenue, marking the 17th consecutive quarter of positive comparable sales growth (up 6% in Q2). E-commerce grew 17%, driven by reduced promotional activity, improved conversion, higher average units per transaction and AUR growth; e-commerce remains underpenetrated at ~12% of total revenue, leaving significant room for future growth. - The company's global loyalty program added 3 million new members in Q2, bringing total global membership to nearly 50 million, with ongoing enhancements to personalization and customer engagement. - Global wholesale grew 3%, led by strength in the U.S. channel, with healthy sellout trends and growing partner adoption of the expanded lifestyle assortment. ### Geographic & Brand Portfolio - International overall grew 6%, led by 12% growth in Asia and double-digit growth in Latin America: Mexico (Levi's second largest global market) grew 15%, while Brazil, the Andes, and Colombia also delivered strong double-digit growth. - China returned to growth after leadership and execution changes, with early encouraging improvement in underlying trends. - Signature (value-focused brand) grew low single digits in Q2, and was up 9% for the first half of the year, with expected acceleration to high single-digit/low double-digit growth in H2 driven by expanded lifestyle and tops assortments. - Beyond Yoga grew 16% led by e-commerce strength, with new lifestyle product launches (including a top-selling linen capsule collection) driving momentum; the brand is in early stages of multi-channel retail expansion, with early positive results from new store formats and untapped opportunity in men's apparel. ### Infrastructure Transformation - Completed the European omnichannel distribution network consolidation, delivering improved operational efficiency, distribution expense leverage, and profitability. - The U.S. Hebron distribution center transition to third-party operator MERS is on track to complete by the start of Q4, slightly delayed to balance strong demand with the operational shift; completion will eliminate duplicative costs, simplify the operating model, and improve inventory and service levels. - Migrated Asia and Beyond Yoga to the new single global cloud ERP platform, following the successful North America transition; Europe and remaining Latin American markets are on track to complete migration by mid-2027. The unified ERP will enable faster data-driven decision-making, support the DTC-first model, and create a foundation to scale AI and automation globally. ### Capital Allocation - Maintains a disciplined balanced strategy, prioritizing high ROI growth opportunities while returning 55%-65% of free cash flow to shareholders via dividends and opportunistic share repurchases. - Increased the Q3 2026 quarterly dividend by $0.02 to $0.16 per share, doubling the annual dividend increase of the past two years, reflecting confidence in sustained earnings and free cash flow generation.

Guidance

- Full year 2026 guidance is raised for the second consecutive quarter, driven by strong first half performance and ongoing business momentum: reported net revenue is expected to grow 7% to 7.5%, with organic net revenue growth of 5.5% to 6%. Guidance assumes existing incremental U.S. tariff rates (30% on imports from China, 20% on imports from the rest of the world) and does not include any benefit from potential $80 million in outstanding tariff refunds. - Full year gross margin is expected to expand approximately 10 basis points year-over-year, driven by structural mix shifts (higher DTC, women's, and international revenue), reduced promotional activity, and cost efficiencies. - Full year adjusted EBIT margin is expected to hit 12%, marking continued sequential margin improvement, with proactive reinvestment in infrastructure and net new store openings. Adjusted diluted EPS guidance is raised by 4 cents to a range of $1.46 to $1.52, up from the prior range of $1.42 to $1.48. - The company continues to expect 50 to 60 net new store openings in 2026, with the majority of openings weighted to the second half of the year. - Q3 2026 expects reported and organic net revenue growth of 4% to 5%, with no expected foreign exchange benefit. Gross margin is expected to expand ~10 basis points year-over-year to 61.8%, despite a 70 basis point FX headwind. - EBIT margin expansion will accelerate in Q4 2026, driven by lapping the 2025 full tariff impact, reduced FX pressure, normalization of advertising spending, elimination of duplicative U.S. distribution costs, and ongoing SG&A discipline. Full year adjusted EBIT margin is expected to end 60 basis points higher than 2025, extending three years of sequential margin improvement.

Segment performance

1. Americas: Delivered 7% organic revenue growth, with the U.S. up 5% across both DTC and wholesale channels. Operating margin declined 40 basis points due to unfavorable tariff impacts, offset partially by cost initiatives and pricing actions. 2. Europe: Reported a 1% organic revenue decline in Q2, driven by the prior year's distribution center transition; first half revenue grew mid single digits, in line with full year guidance. Underlying DTC growth was 7%, with strength in Germany and the UK. Operating margin increased nearly 400 basis points to 21.1%, driven by gross margin gains and lower distribution expenses. High single-digit wholesale pre-order growth for H2 indicates healthy underlying demand. 3. Asia: Net revenues increased 12% organically, with double-digit growth across both DTC and wholesale. Performance was strong across all key markets, driven by consumer demand for the expanded denim lifestyle assortment. Operating margin expanded 350 basis points year-over-year to 15%, fueled by revenue acceleration, gross margin strength, and SG&A leverage.

Risks & headwinds

- Tariff policy remains uncertain, with ongoing fluidity in U.S. import tariff rates that could impact input costs and profitability; potential tariff benefits are not included in guidance due to this uncertainty. - The U.S. distribution center transition has taken longer than originally planned, with modest incremental costs, though the impact is expected to be eliminated once the transition completes in Q4 2026. - Persistent macroeconomic uncertainty could impact consumer spending, though the company has noted broad-based resilience across all consumer segments to date.

Analyst Q&A

• Q: What is the health of the value consumer and Signature brand, and what is the outlook for European DTC growth in H2? /

  A: Signature grew 9% in the first half of 2026, with expected acceleration to high single-digit or low double-digit growth in the second half. It is a small but resilient part of Levi's segmentation strategy, with opportunity for outperformance in women's apparel, which currently makes up only 30% of the business. Consumer demand across value segments remains healthy. For Europe, the Q2 1% revenue decline reflects an 8 percentage point drag from the prior year distribution transition, with underlying organic growth of 7%. DTC growth is expected to hit mid-to-high single digits in H2, and high single-digit wholesale pre-book growth supports confidence in full year mid-single-digit overall growth for the region. European margins are also expanding substantially following the distribution network consolidation.

• Q: What is driving the sequential moderation of the second half revenue outlook relative to the first half, and is it driven by changed consumer behavior or prudent forecasting? /

  A: Broad-based consumer demand remains resilient across all channels, geographies, categories, and price segments, with two-thirds of growth coming from unit sales driven by expanded TAM in underpenetrated categories like women's and tops. The moderation in the second half growth outlook is intentional prudence and conservatism, rather than a reflection of weakening demand. Management has beaten top and bottom line consensus estimates for seven consecutive quarters and raised guidance two quarters in a row, and the current outlook builds in conservatism to allow for potential macro uncertainty.

• Q: What progress has been made on the global ERP transformation, and what value will it unlock once complete? /

  A: The company had nine separate legacy ERP systems, and after prioritizing top line growth first, the business-led transformation to a single standardized cloud ERP is progressing on schedule, with no major issues to date. North America, Asia, and Beyond Yoga have been successfully migrated, with full completion across all regions expected by mid-2027. The unified system will unlock real-time access to standardized data across stores, distribution, and sales, enabling faster, more data-driven decision making. It will also create a unified technical foundation to enable company-wide scaling of AI and automation.

• Q: What is the split of Q2 2026 growth between units and average unit retail (AUR), and what drives AUR growth? /

  A: Two-thirds of Q2 2026 growth came from unit growth, and one-third came from AUR growth, compared to a 50/50 split last quarter and a two-thirds/one-third unit/AUR split in 2025. The full year 2026 target expects a roughly 50/50 split. Key drivers of AUR growth include higher full-price selling from reduced promotional activity, continued growth of the higher-AUR DTC channel, growth of premium offerings like BlueTab (which sells at higher price points than core RedTab), and mix expansion into higher-AUR categories like women's apparel.