Levi Strauss & Co. (LEVI) Q1 2021 Earnings Call Transcript

Levi Strauss & Co. (NYSE: LEVI) Q1 2021 earnings call dated Apr. 08, 2021

Corporate Participants:

Aida Orphan — Investor Relations

Chip Bergh — President & Chief Executive Officer

Harmit Singh — Executive Vice President & Chief Financial Officer

Analysts:

Matthew Boss — J.P. Morgan Chase — Analyst

Paul Lejuez — Citigroup Inc. — Analyst

Jay Sole — UBS — Analyst

Omar Saad — Evercore ISI — Analyst

Robert Drbul — Guggenheim Securities — Analyst

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Laurent Vasilescu — Exane BNP Paribas — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to Levi Strauss & Company’s First Quarter Earnings Conference Call for the period ending February 28, 2021. [Operator Instructions] This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available two hours after the completion of this call through April 15, 2021. Please use conference ID, 5889497. This conference call is also 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, Senior Director, Shareholder Relations at Levi Strauss & Company.

Aida Orphan — Investor Relations

Thank you for joining us on the call today to discuss the results for our first fiscal quarter of 2021. Joining me on today’s call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, CFO. We have posted complete Q1 financial results in our earnings release on our 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 would like to remind everyone 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 the Quarterly Report on Form 10-Q that we filed today 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 non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in today’s earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety 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 one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

And now, I’d like to turn over the call to Chip.

Chip Bergh — President & Chief Executive Officer

Good afternoon, everyone, and thanks for joining us today. I’m very pleased with the pace of recovery in our business and our strong financial performance this quarter particularly in light of a very strong pre-pandemic year-ago base. The actions we’ve taken during the pandemic are having a positive impact on our results. We exceeded our expectations across the board despite one-third of our stores in Europe being closed. Our strategies of leading with our brands, acting with a DTC-first mindset and continuing to diversify our business are working. These strategies are driving record gross margins and significant EBIT margin expansion even as we continue to invest for growth resulting in a healthier structurally stronger business.

Wholesale is bouncing back faster than expected and faster than the overall results of our brick-and-mortar doors reflecting the concentration of our store fleet in tourist locations as well as Europe’s lockdowns. My confidence in the business is even higher than it was just a month ago for several reasons. We’re seeing consumer demand increase given continued recovery in the U.S. and Asia and demand signals for our wholesale business in Europe are even higher than they were in 2019. We’re encouraged by the positive news of the progress of the vaccine rollout in many parts of the world. Consumer excitement and optimism is returning in ways it hasn’t since well before the pandemic. And we’re seeing a denim resurgence as more people are going out.

Consumers are eager to shop the brands they trust and love while sticking to the more conscious consumption they embraced during the pandemic. These trends play to our strengths and are reflected in our strategies. Our strong first quarter performance combined with the strength of the brand around the globe, the improving consumer sentiment and the momentum of our business as we head into the second quarter all fuel my conviction that we are emerging from the pandemic a stronger company. Let me share a few highlights from the quarter. Consumer engagement with our brands remain strong all over the world, demonstrating our ability to identify and provide assortments they want and capitalize on the ongoing trend towards casualization.

Our Men’s Bottoms business has strengthened significantly and was the best performing segment in the first quarter. We are leading denim trends industry-wide and bringing innovative, new products to market. Consumers are embracing the looser fit and wider silhouette trends that we launched during the pandemic, and which are now being followed by the competition. These new silhouettes give consumers a reason to buy Levi’s as we emerge from the pandemic. We introduced exciting products like our Women’s 501 crop and extended sizes earning Glamor UK’s endorsement as one of the best plus sized jeans in the market. We launched new fashion fits focused on Gen-Z for both men and women commanding higher AURs in Asia and Europe as we continue to premiumize the brand.

And relaxed fits for men like the 550, 559 and our comfortable non-denim XX Chino line were up more than 20% over prior year. And finally, I’m excited to announce our upcoming global marketing campaign focused on sustainability and the quality and timeless style of Levi’s which encourages our fans to wear what they love and live with it longer. We’re calling it Buy Better, Wear Longer and it will be supported holistically through media, in-store, and online around the globe launching in late April and early May. In our DTC channel, we’ve continued to accelerate our omni-channel capabilities to ensure that our consumers can get product wherever and whenever it works for them.

Our own e-commerce business grew 25% in the first quarter and increased to 10% of total company revenues. An increasing share of consumer demand continues to be fulfilled by omni capabilities we’ve rolled out in the last year. These include ship from store, associate ordering, BOPIS and two-day shipping. We initially launched these in the U.S. and are now expanding them globally. We recently saw our largest week of sales from associate ordering, a capability that helps ensure we don’t miss a sale and caters to how younger consumers are shopping, behaviors we expect will stick beyond the pandemic. We’re just scratching the surface as these omni capabilities scale they’re becoming increasingly more meaningful.

Our NextGen Store rollout continues around the globe. We’ve opened our first NextGen Store in the Middle East, an ultra-premium store in the Dubai Mall, one of the largest malls in the world shopped by 80 million people annually. We’re leveraging AI to continue to accelerate our digital transformation within direct-to-consumer, a new product recommendation engine on levi.com now personalizes the individual experience online based on consumer profiles and browsing and purchase patterns showing increases in revenue and conversion. Loyalty program membership increased by 35% in the last quarter to more than 5 million members globally and revenue contribution from our mobile app is exceeding expectations and continues to grow month-over-month. We are reaching a younger consumer who is engaging with us more times per month and longer per visit.

We’re using the app as a seamless connector for the online to offline experience and are piloting new convenience oriented in-store features like contactless returns and self-checkout. And we continue to diversify the business. On the international front our developing markets of China, India, and Russia all had great first quarters and represent significant growth opportunities. Despite the lockdowns first quarter sales of women’s bottoms in Europe exceeded Q1 2019 in net revenues. In our top 10 wholesale accounts revenues from our women’s business grew double digits as compared to a year ago. And our wholesale channel continues to transform and become healthier with a higher share of business in digital, mass, premium, and with financially healthy retailers.

Our total digital ecosystem grew 36% and comprised 26% of total company first quarter revenues up from 16% a year ago. The opportunity in digital remains huge and we aspire to grow this over time to a third of our business. All these efforts are driving higher AURs resulting from premiumization, product mix and pricing. And we have additional pricing opportunities going forward on the back of the brand strength. Finally before I turn it over to Harmit I’d like to take a moment to share some of the things we’re doing on the ESG front. We continue to make progress on our goals for climate and water and in becoming a more environmentally resilient company. We recently rolled out new greenhouse gas emission targets to all our key suppliers.

And three quarters of our products are now made with our industry-leading waterless techniques, which had cumulatively saved over 4 billion liters of water and recycled an additional nearly 10 billion liters. On diversity, equity and inclusion we published our most recent representation numbers in February. We still have work to do and we’re putting our money where our mouth is. We’ve added DEI targets as a component of long-term compensation for executive leaders in the company. And we expanded our sustainable fabric collection with the successful launch of Eco Ease bringing our stretch platform and organic cotton together and also driving premium AURs. You can find more details of how we’re making progress against our sustainability goals in our recently issued 2020 Annual Report.

Let me now turn it over to Harmit.

Harmit Singh — Executive Vice President & Chief Financial Officer

Thanks Chip. Good afternoon, everyone. I hope all of you, your families, and loved ones are safe and healthy. We had a very strong quarter beating our expectations despite store closures mainly in Europe. The structural economics of our business continue to improve with ongoing and outsized digital growth, record gross margins and a reduction in base operating costs while reallocating dollars to strategic choices that will accelerate growth. The first quarter was again profitable and generated positive operating cash flow despite the double-digit revenue decline versus prior year.

And while we continue to manage our business prudently as we operate through ongoing uncertainty particularly in Europe, I remain convinced we will emerge from this crisis a significantly more profitable and cash generative company with ROIC in the mid-teens and adjusted EBIT margin of at least 12% much higher than our pre-pandemic margin of 10.6%. As I walk you through additional detail of our first quarter results, my comment will reference constant currency comparisons on a year-over-year basis in U.S. dollars unless I indicate otherwise. We published the details of our results in today’s press release. So I will not repeat all of those here. First quarter net revenues of $1.3 billion declined 16% and adjusted diluted earnings per share was $0.34 both beating our guidance.

Black Friday week falling in the first quarter of prior year hurt year-over-year revenue comparisons by 3 percentage point. Taking into consideration the adverse Black Friday impact and the fact that doors in Europe were closed three months in Q1 as compared to one month in Q4, our estimated Q1 revenue decline was more like high single-digits, a sequential improvement from last quarter’s double-digit decline. Consumer spending continued to shift towards online shopping due to the changing retail landscape. As Chip mentioned, total digital growth was really strong especially in Europe. Within digital, growth of our own e-commerce business was approximately 27% when adjusted for the Black Friday calendar shift.

During the quarter, our e-commerce growth accelerated, reaching 55% for the month of February. And it was again profitable on a fully allocated basis. Our first quarter adjusted EBIT was $174 million and adjusted EBIT margin was 13.3% driven by the acceleration in gross margin while holding SG&A at 2019 levels. We were pleased to deliver adjusted EBIT margin in the low teens while keeping in mind it benefited a couple of points from advertising at only 5% of revenue below our expected annual 7% target. Let me now give you some color on the details. Adjusted gross margin expanded 200 basis points to 57.7%, the highest adjusted gross margin we have ever posted. FX contributed about 70 basis points of the favorability reflecting a weaker U.S. dollar against international currency.

The remaining 130 basis points was driven by the improving structural economics of our business. Levi’s AURs rose in all global channels demonstrating the intrinsic health of our brand. Price increases and a higher share of business from our own e-commerce channel contributed to the expansion. We’ve also reduced promotion both in depth and breadth on the strength of the brand and our healthy inventory position. And gross margins were particularly strong at wholesale, reflecting a strong customer mix including from growth in digital and healthy retailers as well as a favorable shift in product mix towards higher margin product. Adjusted SG&A was down $85 million from prior year, a 13% decline. And at $579 million this represents a return to 2019 levels.

Notwithstanding a substantial increase over the past couple of years behind the areas driving our growth namely direct-to-consumer and technology we’re able to deliver adjusted SG&A at 2019 levels because of the structural cost reduction initiatives we have taken. Now, I’ll share a few highlights from our three regions. First quarter revenues in the Americas declined 13% better than the overall company. Our focus on building a healthier wholesale business in the U.S. is gaining traction as wholesale revenues grew slightly and delivered higher gross margins compared to last year. The full digital ecosystem in the region grew 16% and nearly a fourth of the region sales was digitally driven. Our own e-commerce growth rates in the U.S. accelerated through the quarter to 29% for the month of February.

Our NextGen Store rollout in the U.S. remains on track and these stores continue to outperform. For example a new Scottsdale store is the top performing store in our fleet. And finally, the region’s operating income grew 6% despite the revenue decline on the back of stronger gross margins and cost control. Europe’s revenue declined 22%. Impressive results given a third of the region’s business footprint was closed in the quarter showing the brand strength and our agility to execute a playbook developed over the last year as conditions changed. We are recapturing sales in our own e-commerce channel which grew 40% in the quarter adjusted for Black Friday and where growth rates accelerated in the quarter to nearly 70% in February.

While tourist doors are under pressure local doors are faring well on higher conversion despite lower traffic with growth in the markets that were open including France. Our wholesale channel in the region grew compared to prior year. And we’re seeing a strong forward demand signal at wholesale giving us confidence in a speedy recovery when lockdowns lift. An operating margin of 26% for the region was in line with last year despite the sales decline because of higher gross margin, lower variable expenses and cost discipline. Asia as a region declined 8%. The full digital ecosystem in the region grew over 60% in the quarter. India’s performance was slightly ahead of the region. And importantly this market grew compared to Q1 of 2019 driven by the acceleration of the digital ecosystem and the ongoing transformation of our store fleet and franchise network.

China posted strong growth as expected versus Q1 2020 and direct-to-consumer channels in the market posted growth compared to Q1 2019. We continue to transform our business in China and move towards more company-operated stores. Productivity is up on higher capture rates and a higher share of more premium products. Our bestselling jeans are from made in Japan, made in crafted and Levi’s vintage clothing line. Our beacon store in Wuhan is emerging strongest back to pre-pandemic revenue levels and is selling more tops than bottoms. We are elevating our fleet and opened four new next-gen doors in China in the corridor. And the franchisee reset in the market continues as we clean up unprofitable doors. Our business in China is being transformed and is headed to a mix of 70% direct-to-consumer and 30% franchisee about a year from now.

Three years ago, it was the inverse of this mix. We continue to be pleased with our progress in this key market, which had only 3% of total company revenues, remains one of our biggest long-term opportunities. Turning to balance sheet and cash flows, inventories at the end of the quarter, net of reserves were 2% below prior year and 9% below prior year in the Americas, reflecting our ongoing discipline inventory management. Inventory composition remains healthy with more than two-thirds able to carry over into future seasons. Cash and liquidity remains strong and at the end of the quarter net debt was negative. Adjusted free cash flow in the first quarter was negative $9 million, only a $6 million decline over prior year, despite much lower revenues and adjusted EBIT. We refinanced $0.5 billion of our 5% U.S. dollar notes obtaining a substantially lower coupon of 3.5%.

And in March, we paid down most of our 5% notes. The lower coupon and debt reduction will save us $20 million annually in interest expense. We expect to pay down the remaining $200 million of 5% notes in the second half of this year and with business trends improving, we expect substantial improvement in our leverage ratio as we move through the remainder of the year. We continue to return cash to our shareholders. Last quarter, we reinstated our quarterly dividend payments at $0.04 per share. Based on our strong first quarter performance, I’m pleased to announce that we are increasing the second quarter dividend to $0.06 per share. As business trends continue to improve, we’ll consider increasing dividends further.

Before sharing our Q2 outlook, let me take a moment to provide an update on our sales performance through March. As a reminder, the economic impact of the pandemic really started to hit us in March of last year right after the end of our first fiscal quarter. For the three month period of January through March, revenues were slightly up compared to the same three month period of 2020. Now turning to our Q2 outlook, based on our first quarter outperformance, and our confident in the stronger trends we are seeing headed into Q2 we are banking a Q1 revenue and EPS beat and we are raising our outlook for the second quarter. We now expect reported revenues for the first half of 2021 will grow 24% to 25% versus prior year, significantly higher than the 18% to 20% growth estimate we shared last quarter.

Our higher first half outlook includes our second quarter reported growth estimate of around 140%, a substantial increase from the 120% implied by our prior guide. And we expect to deliver another $0.07 to $0.08 of adjusted EPS in the second quarter bringing first half adjusted EPS to $0.41 to $0.42. Our outlook is on a reported basis and incorporates the expectation that currency will again benefit revenue and adjusted EPS comparisons to prior year. Our perspective balances our confidence in what’s within our control with the uncertainty in the marketplace related to the virus variants, vaccine rollout and the consequent impact to markets and our distribution footprint particularly in Europe where we have assumed current store closures will persist through mid-May.

This equates to a weighted estimate of around 35% to 40% of our stores in Europe. A few color comments on our key second quarter assumptions beyond revenue; we expect gross margin to remain substantially higher than prior year. Due to seasonality we expect second quarter gross margins to dip below first quarter gross margin by at least 200 basis points, a similar trend to what we’ve usually seen in the years prior to the pandemic. SG&A continues to track around 2019 levels. As it did in 2019, second quarter SG&A will increase notably compared to Q1 due to the timing of our advertising campaign. Interest expense will be lower than Q1 reflecting our recent refinancing and debt pay down.

And on taxes, the exercise of stock appreciation rights will benefit our tax rate in the second quarter. Based on recent and potential additional exercises, we expect the tax rate of less than zero and could see it in the negative double-digit in Q2. This benefit will also help our annual tax rate which we now expect will land in the low teens. And finally as we shared on our last call due to the uncertainty introduced by the impacts of COVID, we are planning our current fiscal year in two halves and expect to guide the second-half in our July earnings call after our planning process is complete.

But although we have not yet completed our planning process, the encouraging trend we are seeing suggest that we may see a return to pre-COVID revenues a month or two sooner than our previous thinking, primarily driven by strength of the U.S. consumer and key markets in our Asia region. Accordingly, we are now confident that the fourth quarter revenues will be slightly above 2019 levels with some of our individual markets getting there sooner. We continue on the path of emerging a stronger company when we entered the pandemic a year ago with a sustainable annual adjusted EBIT margin of 12% plus once we return to pre-COVID revenues.

With that, we’ll now open it up and take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Matthew Boss of J.P. Morgan.

Matthew Boss — J.P. Morgan Chase — Analyst

Great. Thanks. And congrats on a really nice quarter, guys.

Chip Bergh — President & Chief Executive Officer

Thanks, Matt.

Matthew Boss — J.P. Morgan Chase — Analyst

So Chip could you elaborate on the denim resurgence? I think that was the commentary that you said that you’re seeing. Is it industry-wide, Levi-specific or maybe both? And then just any additional color that you could provide around I think the comment that you made was demand signals in Europe today are higher than pre-pandemic levels that you were seeing in 2019. Just any additional color around that.

Chip Bergh — President & Chief Executive Officer

Sure. First on the denim resurgence. I do believe that this is both us and industry-wide and it’s being driven by a couple of dynamics. Number one is this continuing trend towards casualization. And we’ve seen it here recently. Now that consumers are starting to get vaccinated and people are starting to get to go out again — there are now occasions that people are planning for. They’re going back out and they’re buying denim and they’re buying the brands they know and trust and are largely reaching for us. I think the other thing that’s driving it, as I said in the prepared remarks are these new fits and silhouettes. We launched this high rise loose fit in early 2020 just as the pandemic was happening.

And it was relatively small collection at first and it really just took off. And so we’ve expanded it, and have continued to build on it. It’s now been followed by all of our key competitors and I think it’s clear to say that it is a big trend which we’ve led. But importantly as consumers start thinking about going out again, it gives people a reason to go out and update their wardrobe. If the it look now is this high rise, loose fit jeans, and that’s true for both men’s and women’s by the way, it gives them a reason to go out and update their wardrobe. And I think that’s a big driver as well. In fact just as a small little side story on that, our relaxed men’s fits the 550 and the 559 are two legacy fits that we’ve had for years.

And literally just a couple of years ago, we were talking about potentially discontinuing them because they were so out of style back then. And those two fit blocks grew 50% versus prior year and in this most recent quarter. So maybe we’re heading into a new denim cycle, the last denim cycle was really started by the skinny jeans. And that was over a decade ago before I joined this company. So I think we may be looking at the start of a new denim cycle. I guess the last thing I’d say about the denim resurgence is don’t forget we have — not only are we the leader in denim, we have enormous opportunity in non-denim as well, and we’re trying to capitalize on that. On the stronger demand signal in Europe, I think that one’s pretty straightforward.

Our brand is red hot in Europe and it has continued to be despite the challenges of the pandemic. And you see that just in the business results with a third of our doors close and our DTC business is half of our business in Europe. And they still posted relatively decent results. Their e-commerce business was up 40% in the quarter when you adjust for Black Friday, but importantly was up 70% in February. So consumers are really reaching for Levi’s and I think there is just a lot of pent-up demand and wholesale customers recognize that and as they reopen, they want to be ready for it and we’re seeing it. But I think it really does trace back to the strength of the brand overall.

Matthew Boss — J.P. Morgan Chase — Analyst

Great to hear. Best of luck.

Chip Bergh — President & Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from Paul Lejuez with Citi.

Paul Lejuez — Citigroup Inc. — Analyst

Hey, thanks, guys. I think you referenced a better mix within wholesale as a driver of gross margin improvement. And I was just curious if you could talk a little bit more about how the geographical mix, product mix or specific retailer mix was really the driver of that. And also sorry if I missed it, but did you mention how women’s and tops performed during the quarter? Thanks.

Harmit Singh — Executive Vice President & Chief Financial Officer

Sure, Paul. So about the U.S. wholesale mix, as we got into the pandemic, strategically we had said when we get out of the pandemic it would be a healthier wholesale mix where the percentage from traditional retailers, the non-digital piece will be lower, but a stronger and a higher mix from the others, which is a combination of a couple of things. One is higher and more premium product, number one. Number two, higher AURs because given the health of the inventory and given the strength of the brand, we have progressively reduced dilution across the board. We’ve also taken pricing. We talked about taking pricing in U.S. wholesale women’s sometime in the middle of last year and that has stuck. We started 2020 with a — I think 2% or 3% pricing increase across the U.S. wholesale, so that stuck.

And the ongoing partnership and the scale that we’re seeing with Target is also helping. And I think as we come out of the pandemic, our focus on this plus the fact that even with traditional retailers we’re focused on the top doors. We also focused on building more of a lifestyle orientation, so I think Chip referenced in his call. If you think about the top 10 wholesale accounts — quite a few of them are in the U.S. Our women’s business continues to grow. It grew in quarter three of last year, grew in quarter four and continues to grow. So your question about women — that business is doing fairly well.

Tops as a mix, companywide is largely the same, about a fifth of our business. But if you think about Europe — and in some other parts of the world, we are seeing growth in tops on a unit basis. It clearly continues to be an opportunity for us. We still sell four bottoms for every top, our goal is to get to one-to-one at some stage. And that’s embedded in our non-denim growth that we’ve talked about, etc, etc. So — if you think about international direct-to-consumer business in lots of markets tops are parity [Phonetic] with bottoms. So clearly continues to be an opportunity.

Paul Lejuez — Citigroup Inc. — Analyst

Got it. Thanks, Harmit. Good luck.

Harmit Singh — Executive Vice President & Chief Financial Officer

Thanks.

Operator

Our next question comes from Jay Sole with UBS.

Jay Sole — UBS — Analyst

Great. Thanks so much. Harmit, you mentioned the impact on revenue from the store closures in the calendar shift. Could you just talk about what kind of impact those factors had on margins in the quarter?

Harmit Singh — Executive Vice President & Chief Financial Officer

Yeah. I’d say — it was a headwind largely because — the average gross margins in Europe are higher than the average company gross margin and stores gross margins are higher. And we didn’t recapture 100% of all the lost sales as stores have closed in Europe. So it was a headwind. But overall if you think about gross margin strength, gross margins were up big time — record gross margins. So other factors like pricing initiatives you’ve taken, the continued growth in AURs and the improvement in channel and geographic mix continue to work in our favor.

We also were helped by FX — in the quarter. We don’t expect the FX benefit to continue. But the other factors broadly I think should flow through the year. I would also say as I mentioned in the call, the record gross margins, don’t bank it on a full year basis because it will adjust in quarter two. Its normal seasonalization in quarter two where gross margins are about 200 basis points lower than quarter one, that’s been our history. But we do think we end the year from a gross margin perspective much stronger than we were in ’19 and ’20.

Jay Sole — UBS — Analyst

Got it. And then if I can ask one more — there’s just been a lot of talk about poor congestion in the Suez Canal issue. Are you seeing that impact your ability to flow inventory in a timely fashion and is it impacting your margins this year, which are more in gross margin or SG&A?

Harmit Singh — Executive Vice President & Chief Financial Officer

Yeah. So we’re watching this carefully the potential bottlenecks in the supply chain. We have experienced delays but the good news for us because — geographically we have a portfolio and we have the brand is really strong. We’ve been able to offset the impact of the delay both in quarter two and we think we can in quarter. Sorry quarter one and we think we can offset that in quarter two. In terms of cost as I mentioned in the last quarter we negotiated capacity and that allowed us — is allowing us to offset some of the increases that we can see. We have had to increase our airfreight but given the strong gross margin we had overall I think that’s again being offset — at least in the short term.

Longer term — we are seeing inflationary pressures but we feel good about 2021 largely because — our product prices are locked in, our broader fulfillment cost prices are locked in. And as we think about 2022 and beyond given the price increases we’ve taken and where we are in pricing we think as a brand — we have the opportunity. We have the pricing power is evidenced by the initiatives we have taken on pricing is also evidenced by the strength of the brand that Chip indicated and our market leadership position. So I think overall we should be fine in ’21 and we will offset any inflation we see in ’22 with pricing.

Jay Sole — UBS — Analyst

Got it. That’s very helpful. Thank you so much.

Harmit Singh — Executive Vice President & Chief Financial Officer

Thanks, Laurent [Phonetic]. Thanks, Jay. Sorry.

Operator

Our next question comes from Omar Saad with Evercore.

Omar Saad — Evercore ISI — Analyst

Good afternoon. Thank you for taking my question. Chip I wanted to follow up on one of your opening comments. It sounded like you said you’re seeing a more engaged and active consumer not just before the pandemic but a period that goes back even farther, wanted to see if you could clarify and elaborate there. And then on the inventory, do you have the supply chain and inventory in the — coming through the chain to meet that kind of exuberant demand as we continue to reopen globally? Thanks.

Chip Bergh — President & Chief Executive Officer

Yeah. So from a consumer demand standpoint and just the comment about it being even stronger than what we had seen immediately before the pre-pandemic. I think what we’re seeing is a combination of a lot of pent-up demand from people being stuck at home and hunker down and not really doing a lot of shopping combined with an exuberance from the economic stimulus here in the U.S., vaccination rates, people feeling more comfortable about going out and these new denim trends that we have established. And I think it’s really a combination of all of those things, Omar. As I said in the prepared remarks, I feel much more confident today than I did even a month ago about our ability to come through this pandemic in a much stronger position and really seeing lift off.

Your question about inventory, it is probably and I’m sure you’ll hear this from others as you talk around the horn during earnings season. I think it’s the biggest challenge we’re all facing is what we’re seeing here recently sustainable for the next six or 12 months or is it a pop in the arm and it goes back to something that looks more like the immediate pre-pandemic period. And so we’re trying to be very balanced. I think that was the word Harmit used as we provide our outlook and as we forecast the second-half of the year. On the one hand, there’s good reason to believe that demand is going to be very, very strong. And as we said, we think our fourth quarter will be ahead of 2019.

But on the other hand — a week ago the Director of the CDC was saying be careful folks because there could be another wave. And so we’re trying to take all this into consideration and be as balanced as we can as we think about our second quarter and in the second-half of the year. And that’s what’s reflected in our guidance. If it turns out to be much stronger, we’ll put a ton of pressure on our supply chain to be able to chase. And I think we’re well-positioned to do that because — many of the products that we’re selling are core replenishment products where we always have the fabric on hand and we can fire that engine up pretty quickly. And the more seasonal things, we’ve got flexibility [Indecipherable] and other things like that to address unexpected higher demand — on what we’ve built in the forecast.

Omar Saad — Evercore ISI — Analyst

Great. Thanks for the color.

Chip Bergh — President & Chief Executive Officer

You bet.

Operator

Our next question comes from Bob Drbul with Guggenheim.

Robert Drbul — Guggenheim Securities — Analyst

Hi, guys. Good afternoon.

Chip Bergh — President & Chief Executive Officer

Good afternoon, Bob.

Robert Drbul — Guggenheim Securities — Analyst

Just a couple of questions. Hi, Chip. Couple of questions for me. Just the first one is, can you talk a little bit more about China in terms of how you feel you’re performing, it sounded pretty good. And I’m just curious if you can maybe give us a little bit of thought around your cotton sourcing, cotton sourcing strategies particularly in China. That’s my first question.

Harmit Singh — Executive Vice President & Chief Financial Officer

Sure. Go ahead Chip. No, no go ahead.

Chip Bergh — President & Chief Executive Officer

Let me take that Harmit. So, first of all let me talk the commercial aspects of our business in China. This remains a huge opportunity for us as you all know. It’s only 2% to 3% of our total global revenue. And — our story in China is one of a turnaround. But we’re very encouraged with the recent trends trying to post the strong growth as we expected versus Q1 2020 where they were impacted by the pandemic and — we’re seeing great results with fewer doors versus a year ago. So we’re continuing to transform our business in China. We are moving more and more towards a company operated footprint.

As we said in the prepared remarks, our Beacon store which we opened in Wuhan just a couple of months before the pandemic started is emerging really strong. It’s back to pre-pandemic revenue levels and we’re really excited about that. So we think we’re making good progress there. We’ve got a great team and now some continuity on that team and see nothing but upside. And over time, we believe that that business mix is going to shift to about 70% DTC and 30% franchise. On the Shin-Jung cotton situation, I guess I would say a couple of things.

First, it is an extremely complicated situation and we are watching it very, very closely. We do not source any products in Shin-Jung nor do we have any relationship with fabric notes in Shin-Jung and it’s in good part, because we have for 30 years had what we call our terms of engagement where we prohibit forced labor anywhere on our supply chain. We also insist with our suppliers, the ability to audit our suppliers on an unannounced basis. Neither one of those things have any supplier in Shin-Jung ever agreed to, so for more than a decade, we have not been doing any business in Shin-Jung. We have not been materially impacted by the boycotts. And — as I said from a commercial standpoint China is a big opportunity for us and we’re going to continue to operate there consistent with our values.

Robert Drbul — Guggenheim Securities — Analyst

Great. And thanks, Chip. And I guess just a follow-up on the Target relationship — I know you guys did the home offering this most recent quarter. Just any update on the Target relationship what you’ve learned so far and really what you’ve learned from the home capsule that you guys did in both online and in the stores? That would be very helpful. Thank you.

Chip Bergh — President & Chief Executive Officer

Sure. Well, first I’ll talk about the home collaboration that we did with them which is what they call limited time offer. It’s a onetime drop that they have done historically now for over 20 years primarily with high-end fashion brands. So Lilly Pulitzer [Indecipherable] they’re done this as I said for 20 years. We’ve been really pleased. And I think they would say the same thing about this collaboration. We did it primarily as a brand energy center of culture kind of moment. And it definitely did that. And hopefully we’ve got an opportunity to go into a Target and see what it looked like in store. It definitely drove a lot of brand excitement. And I think it introduced the Target consumer to Levi’s brand in a way that they had never expected before.

So we’ve been very pleased with it but beyond that we’re really happy with our overall relationship with Target. You’ll remember we entered initially with just 20 store cast on men’s. We were at 140 doors. We’re now at 300 doors across men’s and women’s on our way to 500 doors which we’ve committed to together. We’ll be in 500 doors by back-to-school. The brand continues to do really, really well there. And importantly the Denizen brand continues to do well and Target as well. So we feel really good about the portfolio that we’ve got and their store, the way they’re executing from an in-store merchandising standpoint. We think it’s been really, really good for the brand. They’re selling product out the door at higher than U.S. wholesale’s average pricing and — onwards we’re real happy with that relationship.

Robert Drbul — Guggenheim Securities — Analyst

Thanks Chip. Appreciate it.

Chip Bergh — President & Chief Executive Officer

You bet, Bob.

Operator

Our next question comes from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Thanks. Good afternoon. Chip it sounds like you view the recent AUR gains as adorable. I just wanted to get your view on the opportunity for AUR gains go forward. You said there are continued opportunities. Is that all pricing or are there any other strategies that you’re looking to drive that metric?

Chip Bergh — President & Chief Executive Officer

Well Lorraine, I would say that we do believe that we’ve got continued upside from an AUR standpoint. And as Harmit indicated earlier with the prospect of inflation coming it’s good to be in a position where you don’t need a prayer meeting to take pricing. But we think we can get at a lot of different ways. Mix is important even at the store level. I’m continuing to mix up our business in our mainline doors represents a significant opportunity. Driving down promotions which is something we’ve been able to do pretty successfully over the past two or three quarters now. We’ve pretty much walked away completely from the off-price channel, if you will, the Ross and TJ Maxx’s of the world for flushing inventory because we’ve managed our inventory so well.

So we are focused on growing AURs. We do think we’ve got continued opportunity there. We’ve taken price increases in the last quarter or in the last two quarters on women’s. We took a $10 price increase and it stuck. We’re seeing our pricing stick when we take it. And — even as you think about our assortments on parts of our business where we’ve been really, really successful and I’ll take T-shirts as an example. We have basically one price of — one price point of T-shirts in our stores. There is an opportunity to tier up there. So we’re looking at it very aggressively. But we do think given the strength of the brand on a global basis we’ve got continued upside opportunity here.

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Thank you.

Operator

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger — Morgan Stanley — Analyst

Fantastic. Thanks so much. Really nice results here today. I wanted to ask about the 12% margin target. And Harmit if I heard you correctly I think you indicated that you expected to get back to 2019 levels beginning in the fourth quarter this year. I assume that would continue I guess through the first three quarters of 2022. So, that 12% margin target it sounds like would be on track for 2022. I want to make sure first that I’ve understood you correctly on that. And then when you think about that 12% margin are you thinking that’s sort of where margins are going to normalize kind of medium to longer term or are there other levers that you’ve got to raise margin beyond 2022 to something above that 12% number? Thanks.

Chip Bergh — President & Chief Executive Officer

Thanks, Kimberly. I was wondering when somebody would ask that. So appreciate it. As you know quarter one our EBIT margins were higher than the 12% and the combination of gross margins tracking at 57%, SG&A going back to ’19 levels but revenue is still down 16% or if you adjust for — sequentially organic revenue down high single-digits. So as we think about the path to get to the 12% plus and the reason we are confident about it is there’s three real drivers. One, revenues returning to ’19 levels. We think Q4 of ’21 is the first quarter where we as a company holistically will have revenues higher than Q4 of ’19. There are countries and there are markets that are already there and some will get there earlier.

But that’s the first driver. And if that continues which we believe it is longer term, I think it really bodes well. The second is SG&A to ’19 levels. We are already there. I think our latest perspective on the first half really talks about ’19 levels of revenue even in quarter two. And I think this is an important point because by the end of ’21 we’ll have 250 more doors that we are operating than the end of ’19. And as you know brick-and-mortar does add SG&A. But we’ve been very successful as a team as a company reallocating dollars between — the other forms of overheads and — towards things that will really accelerate growth, things like digital, things like technology, things like AI etc, etc.

And the third is gross margin acceleration. And — I think what we have said in the past is think of a 56 handle on a full year basis. And obviously we can’t replicate the gross margins in Q1 for a whole bunch of reasons including FX. But I think over time all the actions we have taken including the AUR question we just talked about plus the channel mix plus the pricing power the brand has I think besets [Phonetic] and improve that. Going to your question about sustainability of the 12% plus and what’s the growth algorithm, I think we can sustain the 12% plus.

In terms of what the growth algorithm is I think let’s put the pandemic behind us. Let’s have a moment or two of what I call sustainable results. And then we’ll come back and talk about what our sustainable growth algorithm is. But what I would remind everybody is even pre the pandemic when we went public we talked about growing our adjusted EBIT margins 20 basis points to 30 basis points. And that was driven on the back of growth in gross margins as well as slower growth on SG&A costs. So — about the future ’22 and beyond, we’ll get back to you, but we feel good about the path to get to 12% plus.

Kimberly Greenberger — Morgan Stanley — Analyst

Fantastic. Thanks so much.

Chip Bergh — President & Chief Executive Officer

Thanks Kimberly.

Operator

Our next question comes from Laurent Vasilescu with Exane BNP Incorporator.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Good afternoon. Thanks for taking my questions. Following on Kimberly’s question, Harmit, I think on recent calls you noted you would execute about $200 million structural cost savings, which I think half would be reinvested. Is that still the right way to think about it? And then on the $78 million decline in SG&A for the first quarter, can you maybe parse out how much was driven by cost savings? And how do we think about the cost savings over the next three quarters?

Harmit Singh — Executive Vice President & Chief Financial Officer

Yeah, I think Laurent I think to your first question the $200 million, less $100 million is broadly correct. I mean when we started 2020 pre-pandemic our run rate on SG&A was higher than ’19. What we did during the pandemic is we took out some structural cost and we’re reinvesting in areas that will accelerate growth, omni-channel technology AI, new doors, etc. And I think the best way to think about SG&A is that there will be puts and takes on a quarterly basis. But think of us closing the year at ’19 levels of SG&A. In quarter two we will accelerate our investment in advertising and promotion because of the campaign that we talked about. But on a full year basis, we think advertising and promotion costs are about 7% of revenue. And I think that’s the basis of our thinking. There is probably inflation. We are doing our best to offset inflation through productivity and cost efforts. Our indirect procurement and sourcing teams are doing a phenomenal job taking costs out and I think those are the things that give us confidence that we can keep costs in check.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Very helpful. Thank you very much.

Operator

Our next question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon everyone and congratulations on such a nice improving results.

Chip Bergh — President & Chief Executive Officer

Thank you, Dana.

Dana Telsey — Telsey Advisory Group — Analyst

In the past as you’ve talked about the DTC channel and the split between e-commerce and stores, what’s the update on the store format NextGen and how you’re thinking about the omni-channel initiatives there where they ship from store any of the other activations?

Harmit Singh — Executive Vice President & Chief Financial Officer

Yeah. So I think Dana what we have said about direct-to-consumer, I mean when you think about last year direct-to-consumer broadly was about 40% of our business. As we’ve made the strategic pivot to the three areas that Chip talked about with direct-to-consumer being one of the three. We’ve said that we could grow direct-to-consumer to around 60% of our total revenue over a period of time. So we feel good about it. And as that grows we think our own e-commerce business — doubles in size. And once our e-commerce business doubles in size, we think our own e-commerce business gets to the 12% EBIT margins that we’re talking about. So — this quarter because of the fact that our doors were closed largely in Europe and Europe as you know has a large direct-to-consumer business, our direct-to-consumer business was down I think in the mid-20s where wholesale was down much, much less.

But I think structurally longer-term we feel good about growing our direct-to-consumer business because we’re making efforts on expanding omni-channel. We’ve done a ton in the U.S. on omni-channel, BOPIS, I think Chip talked about think about loyalty, think about the app that we’ve launched, etc. We’re in the process of scaling that now across Europe. Ship from store is what we launched during the pandemic. It’s across the U.S. And now markets in Europe are deploying it. For example, in the next month Belgium, Netherlands, Spain, France will all have ship from store. So we’re really focused on expanding omni-channel globally. That’s going to take some technology dollars. We’ve got that in our capital forecast. But where it really makes a big difference is the direct engagement with our consumer and we — and especially the younger consumer and we think that really bodes well for the brand longer term.

Dana Telsey — Telsey Advisory Group — Analyst

Great. And then, Chip just to follow up on — Target obviously in the new home collection you’ve had collaborations that have been successful. What should we be looking for in either the next few quarters in terms of activations for the brand, any collaborations, new products that we should be watching? Thank you.

Chip Bergh — President & Chief Executive Officer

We do have a number of collaborations coming. Just in this last quarter, we had more than 10 different either regional or global collaborations. In fact, the Pokemon launch, which was back in February was one of our strongest collaborations of all-time and it drove 20% of our app revenue in February. So these collaborations the way I’ve talked about them before is they bring a lot of heat to the brand and they drive a lot of interest. But most of them are relatively small in terms of volume and revenue, but they just drive a ton of excitement and interest.

There one in particular that I think should be on everybody’s radar for the second quarter and that is our second collaboration with Valentino. So we’re launching 517 units of Levi’s-Valentino Vintage 517, but we’re also doing a 5,107 units of a re-addition of the 517, which is a replica of the original vintage Orange Tab 517 jeans both adorned with cobranded patches and interiors with Valentino. The re-addition 517 is now live online for preorder. We talk about premiumizing the brand. It’s a unisex jeans. It’s going to be sold at Saks, Neiman Marcus, Bergdorf, Luisa Via Roma and Saks has already sold out of this collaboration at a preorder price of $990 per pair. So it’s another example of — it’s not a ton of units but it’s going to bring a ton of excitement and heat and it’s just another way to continue to premiumize the brand.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Chip Bergh — President & Chief Executive Officer

You’re welcome. Thank you Dana. Yeah. We’ll end it there. We’re right at 3 O’clock or so West Coast Time. And I want to thank you all for dialing in. And we look forward to talking to you again on our Q2 earnings call in a couple of months. Thanks very much everyone.

Harmit Singh — Executive Vice President & Chief Financial Officer

Thank you. Stay safe, healthy.

Operator

[Operator Closing Remarks]