Levi Strauss & Co. CFO Harmit Singh joins Yahoo Finance Live to discuss company earnings, inflation, consumer spending, the state of retail, and the outlook for growth.
Video Transcript
BRIAN SOZZI: Retailers are doubling down on cost saving measures as inflation spikes, but also doing what they can to keep merchandise compelling for shoppers. Joining us exclusively following the company's investor day on Wednesday afternoon is Levi Strauss CFO Harmit Singh. Harmit, good to see you. Clearly, you mean business today.
You have the leather jacket on instead of the traditional Harmit jean jacket. Let me ask you this-- so your five-year outlook was pretty interesting. You plan to add, I would say, a little more than $3 billion in sales over the next five years. How do you get there?
HARMIT SINGH: Yeah, sure, Brian. Thanks for having me. And what I'm wearing is the [INAUDIBLE] Korsett classic jacket by Levi's that Albert Einstein wore for a long time in the 1930s. And we picked it up and a collection team-- vintage clothing team came up with a replica that has sold really well.
So to your question about what gives us confidence about accelerating growth-- we went public a couple of years ago. We run the company for the long-term. The Levi's brand is the strongest it's ever been, as demonstrated by record gross margins and our market leadership position that we continue to grow. Structurally, we're a very different company today.
We're more diversified. Direct-to-consumer is 40% of our businesses. It used to be half that. Women's is a third of our business and accretive to gross margins. And wholesale is healthier and a lot more profitable. And financially, we just reported the strongest year in '21 in decades.
Our balance sheet is really strong. Our EBIT margins are up 12%. So it's time to accelerate growth, accelerate profitability, and commit to a higher return of capital. What is going to drive the growth? A couple of things.
First, we have five brands. We acquired Beyond Yoga. Dockers was declining til a couple of years ago. So all our five brands, as we reported in quarter one, are growing. Casualization trend is here to stay. That is a great tailwind.
We believe we can double women's. We can double our tops business. We still sell three bottoms to one top. The ratio is 1 to 1. And our thinking is we can get to 2 to 1 by 2027. We believe our direct to consumer business, which is 40%, can get to 55%.
We think we can open 400 new doors across all our brands over the next five years and continue to drive same-store sales. We also-- e-commerce is fairly under-penetrated for the company. It's only 8% of our total business. It used to be 2% a decade ago, has grown during the pandemic. And we believe we can triple that.
And all the categories and areas we're looking at are high gross margin. So that drives higher EBIT margin. And today, we're a little over 12%-- our view is by 2027, that becomes about 15%. Generating a lot of cash, which we start returning to shareholders in the form of higher dividends, and share repurchase program.
Our board a couple of days ago approved a share repurchase program of $750 million for the next couple of years. So that gives-- all these things give us confidence.
BRIAN SOZZI: Harmit, I talked to you about a month ago in New York City over at the NASDAQ-- things seemed fine with retail. And since then, the bottom has dropped out. Inventories are piling up. We've had various warnings profit margins under pressure. How is your current quarter looking?
HARMIT SINGH: Yeah. We report in a month. We don't guide quarterly. What I said yesterday at the investor meeting-- we ended our quarter on Sunday. So the ink is not dry. But we believe, based on trends we are seeing, we will meet our own internal expectations.
And we have reaffirmed our annual guidance that we gave out when we reported Q1, which basically translates to 11% to 13% growth in revenue relative to 2021 and an EPS of between $1.50 to $1.56. So overall, because of the diversified nature of our business, we feel fairly confident about affirming our full-year guidance.
BRAD SMITH: Hey, Harmit. Brad here. When you think about the direct to consumer goals that you've set forth, and that five-year target, even, and the new doors that you anticipate opening even in the future as well, would that lead to a trimming of some of the retail partnerships that you have that are not run by Levi's?
HARMIT SINGH: Yeah. No, it's a good question. We said one of our strategies-- three choices were DTC first. It doesn't mean DTC only. We have strong relationships with our retailers and customers around the world. They're a very important part of our business.
Our focus on direct to consumer is to drive the direct engagement with the consumer. Levi's is becoming a more lifestyle product, a head to toe look. I'm wearing the Levi's shirt and the Levi's jacket. So it's more than pure bottoms.
And direct to consumer and our own stores allow us to bring the assortments to life. And that's why we think opening those and growing e-commerce is important. Those performed really well. The return on invested capital is in the high teens. And you know, so it's profitable, as well as allows us to showcase and engage directly with the consumer.
And our wholesale customers are also beginning to show more of a head to toe look for Levi's. And we are focused on feminizing, at least in the US, the brand offer with wholesale customers as we expand relationships with Nordstrom, with Target, et cetera.
BRAD SMITH: OK, and so that starts to get into my next question, particularly around the type, the profile of customer that really kind of allows you to put out these targets and gives you the confidence to meet them over the next five years.
HARMIT SINGH: Yeah, sure. 10 years ago, the average age of a consumer in the US was older. It was in the high-40s. Today, it's a lot younger. So we are doing a great job connecting with the younger consumer-- the Millennials, the Gen Zs-- especially as we drive more brand [INAUDIBLE] collaborations.
I was wearing a New Balance collaboration yesterday. We've got wonderful collaborations. And so our view is being a democratic brand across all our brands, we are connecting with consumers of all ages and demographics around the world. And I think that's really what's helping us accelerate growth and drive the direct engagement.
We also are rolling out a loyalty program. We have about 19 million loyal fans today. And our view is we can have a lot more loyal fans. But we're just beginning the rollout. We're seeing our loyal fans engage more directly with us, more frequently with us. And I think that makes a big difference.
BRIAN SOZZI: Harmit, I think the word you used yesterday with regards to pricing is you have taken surgical price increases. What does that exactly mean? And jean prices, they've gotten expensive. What type of increases have you taken?
HARMIT SINGH: Yeah, no, we started taking price increases about a year ago because we were mindful of the fact that inflation probably is here and here for longer than was indicated. Because the brand is so strong, it has pricing power. But we are very mindful, Brian, about the price value equation.
And our view is based on research that despite the price increases that we have taken, our brands provide real value, our products provide real value to the consumer. When I talked about-- we talked about surgical pricing, it's very important to ensure that when we price, we price for innovation, for value that we provide.
So as we introduce new styles, as [INAUDIBLE] 501, that was priced higher because it has organic cotton, it is something that the consumer needs, and is better for you. And you know, so from our perspective, those are the things that drive it.
So when you think about surgical pricing, it's not taking a standard pricing increase across the board. That is something that we do. But that's that last piece of action. We also are using AI and machine learning to decide what are the levels of markdown, what are the levels of pricing based own price elasticity that we see with different consumers. So it's very thoughtfully done and done in a very disciplined way.
BRAD SMITH: Harmit always a pleasure to speak with you. And thanks for taking the time here. We're going to be keeping a close tab on the company and, of course, some of these targets that you've laid out-- Levi Strauss and Co CFO Harmit Singh joining us here today on Yahoo Finance Live.