Levi Strauss & Co's Earnings Call Contradictions: U.S. Wholesale Outlook and Supply Chain Cost Timeline at Odds

Date of Call: Apr 7, 2026

Financials Results

• Revenue: Net revenues up 9% organically, 14% reported, with Q1 growth benefiting by ~2 percentage points from a $30 million timing shift from Q2 2026 distribution center moves.
• EPS: Adjusted diluted EPS $0.42, up 11% year-over-year.
• Gross Margin: 61.9%, slightly better than expectations, down 20 basis points year-over-year primarily due to tariffs.
• Operating Margin: Adjusted EBIT margin 12.5%, or 14.1% excluding the impact of A&P timing.

Guidance:

• Raised full-year reported revenue growth guidance to 5.5%-6.5% (up 0.5 point) and organic revenue growth to 4.5%-5.5% (up 0.5 point).
• Gross margin now expected flat to slightly up versus prior flat to prior year.
• Adjusted EBIT margin now expected ~12% (up from 11.8%-12%).
• Adjusted diluted EPS now expected $1.42-$1.48 (up from $1.40-$1.46).
• Q2 revenue expected up 4%-5% (3%-4% organic), with adjusted EBIT margin 8%-9% and adjusted diluted EPS $0.22-$0.24.
• Full-year H1 EBIT margin expected 10%-11%, accelerating to 13%-14% in H2.

Business Commentary:

Revenue and Earnings Growth:

• Levi Strauss & Company reported 9% organic net revenue growth for Q1 fiscal 2026, with a 14% reported increase.
• The growth was driven by strong performance across all regions and channels, particularly in Europe and Asia, and was attributed to the company's strategic focus on the Levi's brand and direct-to-consumer expansion.

Direct-to-Consumer (DTC) Expansion:

• The DTC channel grew by 10%, with comparable sales up 7%.
• This growth was fueled by increased product commonality, enhanced consumer engagement, and a focus on fewer, bigger product stories, which improved storytelling and alignment across markets.

International Market Performance:

• International markets showed 12% growth, with Europe growing 10% and Asia 12%.
• The strong performance was driven by the momentum in the elevated denim lifestyle assortment, successful product launches, and market-specific strategies such as the revitalization of the Signature brand in Italy.

Product Category Growth:

• Growth in women’s products accelerated by 13%, and tops also grew by 13%.
• This was due to the company's evolution into a head-to-toe lifestyle brand, with innovative product offerings in both core and fashion-forward fits across genders.

Pricing and Margin Strategy:

• The company exceeded adjusted EBIT margin expectations, with an adjusted EBIT margin of 12.5%.
• This was achieved through pricing actions, lower promotional activity, and improvements in flow-through, despite a slight contraction in gross margin due to tariffs.

Sentiment Analysis:

Overall Tone: Positive

• Management stated: "2026 is off to a strong start" and "we exceeded expectations across the top and bottom line." They also noted "continued momentum of our strategies" and "confidence in the direction we’re headed." Guidance was raised across revenue, margin, and earnings.

Q&A:

• Question from Laurent Vasilescu (BNP Paribas): Can you talk about what’s driving the momentum in the business and how confident you are in sustaining that momentum, particularly with the uncertain macro backdrop? Also, on SG&A, how should we think about distribution expenses and overall expenses for the balance of the year?
  Response: Momentum is driven by execution of strategies, broad-based growth, and consumer response to innovation; confidence is high enough to raise full-year guidance. SG&A as a percentage of revenue is expected to end the year in the mid- to high-49% range, lower than prior year, with improvements driven by volume leverage and tighter cost discipline.

• Question from Oliver Chen (TD Cowen): Regarding the guidance, it seems conservative given the two-year comps decelerate. Why wasn’t the guidance higher? In U.S. wholesale, which parts were better than expected? What is embedded for promotions and margin mix going forward?
  Response: Guidance is prudent, incorporating a contingency for potential tariff reductions and not assuming any change in underlying trends. The wholesale beat was largely driven by U.S. and Europe, with strong performance in women’s and tops. Gross margin is raised to flat to slightly up as tariffs are fully offset; focus remains on converting more revenue to profitability.

• Question from Ike Boruchow (Wells Fargo): Can you clarify the commentary on Europe in Q2? Quantify the $30 million shift from Q2 to Q1? What’s the expectation for DTC leverage the rest of the year and when could distribution costs return to ~5% of sales?
  Response: Europe Q2 organic constant currency revenue is guided flat, but H1 is expected mid-single-digit growth. The $30 million shift is primarily wholesale. Distribution costs in Europe are scaling down, and U.S. transition costs will taper off in H2; the goal is to improve flow-through and reduce costs over time, but no specific timeline given for reaching ~5%.

• Question from Jay Sole (UBS): Can you talk about what you’re seeing in the U.S. recently? How did the Super Bowl event impact, and are there plans for the World Cup? Will that affect SG&A?
  Response: U.S. was up 4% in Q1 with both channels performing well. Super Bowl campaign launch was highly successful with 1.4 billion impressions; marketing spend peaks in Q1 and normalizes to 7% of sales for the year. World Cup plans are baked into the annual marketing budget.

• Question from Brooke Roach (Goldman Sachs): How are you thinking about pricing power and elasticity? Did you see any impact from recent price increases? What are plans for markdowns in H2?
  Response: Pricing strategy is part of a premiumization effort; consumer response has been positive with no observed demand impact. Growth in Q1 was balanced between units and AUR. Markdowns are expected to decrease as new allocation systems and supply chain improvements enhance full-price selling capability.

• Question from Bob Drbul (BTIG): You talked about ocean freight and cotton being locked through 2026. Have vendors tried to pass through any increases? How far are you locked on freight and cotton?
  Response: Locked through year-end on base ocean and air freight rates; surcharges are factored into guidance. No vendor price increases have been seen currently; product cost reduction efforts are ongoing through SKU rationalization, global assortments, and tighter calendars.

• Question from Suraj Malhotra (Raymond James): Looking at the 4.5%-5.5% organic revenue growth guidance, how should we think about the split between unit growth and AUR growth?
  Response: Expect an even balance between units and AUR growth, driven by expanding addressable markets (e.g., lifestyle categories) and new store openings.

• Question from Paul Lejuez (Citi): How did Q1 look on a monthly basis? Any regional acceleration or deceleration?
  Response: Q1 trends were consistent through January and February; quarter-to-date trends remain positive. Asia started strong, China showed positive progress, while Europe and U.S. trends are consistent with no apparent changes.

• Question from Adrienne Yee (Barclays): Where are you seeing the most surprise in international growth acceleration? How does go-to-market differ by region?
  Response: Asia is growing ~12% with 60% DTC, Europe mid-single-digit with strong DTC, Americas low- to mid-single-digit with a shifting mix toward DTC. Store openings are focused in Asia and U.S.

Contradiction Point 1

U.S. Wholesale Performance and Outlook

Contradiction on the strength and growth trajectory of U.S. wholesale.

What were Oliver Chen's key questions during the TD Cowen earnings call? - Oliver Chen (TD Cowen)

2026Q1: U.S. wholesale beat largely driven by U.S. and Europe, with strong women’s and tops growth. There is still runway for growth; women’s and tops in wholesale remain under-penetrated. - Harmit Singh(CFO)

Why wasn’t the guidance higher given the momentum, particularly in U.S. wholesale where certain parts performed better than expected, and what’s embedded for promotions and margin mix as lifestyle progress continues? - Brooke Roach (Goldman Sachs)

20260129-2025 Q4: U.S. grew 4% in 2025; Q4 flat due to lapping a high sale from a digital wholesale customer and DTC capacity constraints. 2026 guidance is low to mid-single-digit growth for the Americas, with U.S. wholesale rationalization (non-strategic accounts) impacting global wholesale outlook of flat to slightly up. - Harmit Singh(CFO)

Contradiction Point 2

Supply Chain/Distribution Cost Timeline

Contradiction on the expected timing for benefits from the U.S. distribution network transformation.

Ike Boruchow (Wells Fargo) - Ike Boruchow (Wells Fargo)

2026Q1: U.S. distribution transition costs are being managed, with costs tapering in H2. Commitment to reducing distribution costs to 12%-15% over time, but specific timeline not provided. - Harmit Singh(CFO)

Can you clarify Europe’s Q2 guidance, quantify the wholesale dollar shift from Q2 to Q1, outline expectations for DTC leverage for the remainder of the year, and estimate how quickly distribution expenses could return to ~5% of sales? - Rakesh Patel (Raymond James)

20260129-2025 Q4: Transitory higher distribution costs are expected through the first half of 2026, with benefits (cost easing, efficiency gains) materializing in the second half. - Harmit Singh(CFO)

Contradiction Point 3

Guidance Conservatism and Macro Uncertainty

Guidance is described as both raised and prudent, with differing explanations for macro uncertainty.

Laurent Vasilescu (BNP Paribas) - Laurent Vasilescu (BNP Paribas)

2026Q1: Confidence is high... leading to raised full-year guidance. - Michelle Gass(CEO)

What factors are driving current business momentum, and how confident are you in sustaining it amid uncertain macro conditions in Europe and North America? - Matthew Boss (JPMorgan Chase & Co)

2025Q3: Q4 guidance is conservative due to macro uncertainty. - Harmit Singh(CFO)

Contradiction Point 4

Outlook on Gross Margin Expansion

Contradiction on whether gross margin expansion is sustainable and in which direction.

Laurent Vasilescu (BNP Paribas) - Laurent Vasilescu (BNP Paribas)

2026Q1: SG&A as a percentage of revenue was ~49% in Q1. Full-year expectation is mid-to-high 49%, lower than prior year. - Harmit Singh(CFO)

Can you discuss the factors driving current business momentum, confidence in sustaining it, and how SG&A and distribution expenses will impact the full-year operating margin? - Matthew Boss (JPMorgan)

2025Q2: Gross margin reached a record 62.6% in Q2, expanding 140 basis points year-over-year. ... The company is not at the peak of gross margin expansion and expects to continue improving. - Harmit Singh(CFO)