Levi Strauss & Company (NYSE: LEVI )
Third Quarter 2022 Earnings Conference Call
October 6, 2022 5:00 PM ET
A member of the company
Aida Sirota - Vice President of Investor Relations
Chip Berg - President and CEO
Harmeet Singh - Chief Financial Officer
Call the participants
Bob Drbull - Guggenheim title
Paul Lehuise - Citigroup
Omar Saad - Evercore ISI
Matthew Boss JP Morgan
Chris Nardone - Bank of America
Alex Stratton-Morgan Stanley
Ike Borukkov - Wells Fargo
Laurent Vasilescu - Exane BNP Paribas
J Sol - UBS
Telsi Fund - Telsi Group
Presentation
Operator
Hello guests and welcome to Levi Strauss & Company. Third Quarter Earnings Conference Call for the period ending August 28, 2022. All parties will be in listen-only mode until a question-and-answer session where they follow instructions. The conference calls are recorded and may not be reproduced in whole or in part without the prior written consent of the Company. This conference call is a webcast and a recorded webcast will be available on the company's website at levistrauss.com later this quarter.
I would like to mention Ida Sirota, who is now Vice President of Investor Relations at Levi Strauss & Company.
Hadis orphans
Thank you for joining us on today's call to discuss our F3Q 2022 results. Chip Berg, Chairman and CEO of Levi Strauss and Harmeet Singh, our CFO, join us today. We published our full financial results for the third quarter in our earnings release on the IR section of our website at investor.levistrauss.com. A link to the Today's Call webpage is also available on our website.
We would like to remind everyone that we make forward-looking statements about this competition that are subject to risks and uncertainties. Actual results may differ materially from those anticipated in our forward-looking statements. Please review the SEC filings, particularly the "Risk Factors" section of the quarterly Form 10-Q filed today for factors that could cause differences in our results. Please note that any forward-looking statements made in connection with this call are based on information available as of today, and we undertake no obligation to update any of these statements. During this call, we will discuss certain non-GAAP financial ratios. These non-GAAP measures are not intended to replace our GAAP results.
Finally, this call has been broadcast in its entirety on our IR website and will be available again on the website soon. Today's call is one hour long, so please limit yourself to one question at a time so others can answer your questions.
And now I want to transfer calls to the chip.
Chippewa
Good afternoon and thanks for joining us today. As you know and have heard from other companies, since we spoke to you in early July, macroeconomic conditions have been deteriorating. As we entered the third quarter, inflation, declining consumer confidence and rising interest rates began to weaken consumer demand, with our industry experiencing disruptions in the economy, supply chains and a strong advertising environment. No wonder it's a tough quarter.
Nevertheless, we managed to deliver strong results with net sales growth of 7% in constant currency, which translates to a 1% increase on a reported basis. While this was below internal expectations for the first time in many quarters, our team responded to this highly volatile environment by focusing on regulatory controls. We have acted quickly to remain competitive and maintain revenue, achieving a double-digit adjusted EBT margin of over 12 percent.
I have talked about the importance of a strong brand in these difficult times. Our brand remains very strong, showing strong growth despite difficult conditions. In particular, excluding the impact of foreign exchange rates, we posted strong FX gains across our core brands, with Levi's up 6% and Dockers up 13%. But beyond the revenue results, there are other important facts that highlight the strength of our brand.
First, we posted the highest third-quarter revenue for a Levi's brand this quarter, both by category and by gender. We have made significant progress in winning over the next generation of fans, while increasing our share of the 18-30 age segment in the United States, maintaining our leadership position and brand awareness among consumers of all ages. . In most markets.
Second, the power of the brand is equal to the power of the price. AUR has risen between the numbers in a more promotional context, and our chosen price remains unchanged to compensate for inflation.
Third, as a result of our pricing policy, our gross profit margin, while slightly lower year-over-year mainly due to currency and discounts, was stable and still approximately 400 basis points above pre-exchange levels. . We have been able to offset rising inflation.
Fourth, our direct-to-consumer business continues to grow over 8% in constant currency, which, among other things, Harmit and I will continue to refer to in the rest of our observations. and electronic commerce. .
Having a strong and influential brand and a diversified business is important in these uncertain times. Although some US wholesale customers have delayed order fulfillment, this benefit has allowed us to increase global wholesale payments by 6% and overall US trade payments by 5%. To put the US results in context, we lagged just 1% of the global Danish market and overall US apparel market, which fell on average in the June-August quarter, according to NPD data.
I think it should be noted that although the denim category has decreased in the last three months, it is still moderate compared to the pre-epidemic period. Despite a weak quarterly category, we are confident that the long-term dynamic trend will continue to support the business.
Additionally, even with continued supply chain constraints, our team has acted quickly to reduce results by at least $30-40 million, or approximately two to three percent revenue growth. As the operating environment becomes more complex and supply disruption continues, our unique and long-term competitive advantage will differentiate us from our competitors.
Let me tell you about our progress on our strategic priorities for the quarter, again, all in constant currency. Our first strategic priority is our brand. As mentioned, the Levi's brand is up 6% year-over-year and up nearly 10% from 2019. We're continuing to build on our success with the launch of the new Baggy Aba, a soft suit that delivers 90s style. Performance, plus our new boot cut and direct fit styles.
For women, the loose fitting trend also increased by 20% from high to medium transition. The Iconic 501 family is once again showing double-digit growth in both men's and women's sales. 149 years later, this adaptation continues to resonate. We continue to position the Levi's brand as a cultural centerpiece by partnering with leading brands and cultural icons.
The collaboration with GANNI is back this year and was seen on the runway at Copenhagen Fashion Week and sold out within two weeks. And in his new collection of Levi's ripped jeans, Golden State Warriors guard Steph Curry graces the cover of Rolling Stone magazine's October issue. We also launched the second iteration of our long-running Wear Better campaign, designed to inspire younger and younger consumers by highlighting Levi's timeless quality and style.
Additionally, the campaign highlights the sustainability of Levi's pairs. This is the most plugin we've done since joining the company ten years ago, that's how resonant this message is.
Let's move on to our second task. The company's overall DTC channel grew 8%, with owned and operated flagship stores and outlets posting higher traffic and AUR growth in Q3 than a year ago. Another example of our brand strength. And as shoppers return to our stores, e-commerce is up 16% in Asia, thanks to Lewis Beyond Yoga and Dockers. Overall, e-commerce grew 64% year over year, with double-digit growth in the US and Europe and more than doubling in Asia.
Globally, the Levi's app continues to post double-digit new monthly revenues from active users as well as 17% revenue growth. And through our global loyalty program, which has seen double-digit growth in membership and total revenue, we've made progress by strengthening our direct and personal relationships with our consumers. We also grew our global wholesale business with the Lewis brand in Asia and America by 6%. In the US, the Levi's brand has seen significant growth in sales of new women's clothing. This increase was offset by a 12% decrease in prices for our Signature and Denizen brands, which are more vulnerable to changes in consumer discretionary costs. In addition, this business was impacted by the decline in Denizen Women's distribution targets as we expanded Levi's Red Tab. As a reminder, our lower value brands only represent an average single-digit percentage of our total net revenue.
Diversifying our portfolio is our third strategic priority, and beyond Dockers and Yoga, the strong momentum we've built on each of our key growth opportunities, women's, mainstream, international and other brands are each contributing positively to growth. . . In our company, the total business of women has grown by 8%, which is 6% more than men. The women's business was supported by funds from Lewis, which grew by 7% and strengthened significantly in the US.
Plus, the small but thriving women's movement in Dockers is a plus, like Beyond Yoga. As we continue to diversify our offerings, the company has seen an overall increase of 12%. Levi's T-shirts were up 8%, driven primarily by men, who were up 14%. We continue to see strong success in t-shirts, sweaters and knits, while our Levi's Women's business is showing positive growth in non-graphic t-shirts, apparel and sweaters.
Our global business grew 8% despite a very difficult consumer environment in Europe and China. We had encouraging results in Asia, where growth was 68% excluding China, and in many of our largest and most important European markets, particularly the UK and Spain.
Our refreshed Dockers brand, with its classic California aesthetic, posted 13% growth in AUR and sales volume, delivering strong margins that exceeded our targets. Brands are achieving growth in key regions and channels. The United States grew by 2%, international physical trade and electronic trade recorded significant growth. Port women and leading companies also saw strong growth and increased as a percentage of product sales.
Beyond Yoga had net income of $22 million and consumer demand was strong in the quarter, led by company-led e-commerce sales that rose at a regular double-digit rate. The brand has been adopted by 28 colleges across the country, raising awareness and reaching new consumers. Perhaps most exciting, Beyond Yoga opened its first permanent store in Santa Monica late last month, showcasing the brand's product categories for the first time. Although we are just getting started, we believe there are exciting long-term opportunities to expand our brand presence at retail.
Finally, one of our company's most important goals is to lead the industry and manage the environment. Last week, we released our annual Sustainability Report, which includes full disclosure and introduces a new list of 16 [total] (ph) Sustainable Development Goals across three focus areas: climate, consumption and society. You can find my report on the sustainability tab of our website.
In conclusion, we continue to make continued progress toward our long-term goals as we face more challenging conditions in the third quarter. While we expect this to be a difficult quarter in the coming quarters, I am confident in our ability to meet short-term challenges and, most importantly, in our confidence to achieve our long-term goals for the following five reasons. First, we have a very strong brand name. Second, our category is structurally attractive for long-term tailwinds with unreliable trends and gene cycles. Third, we have global reach to respond to disruptions and manage price inflation with competing suppliers. Fourth, we have a diversified business model where we have greater opportunities to increase gross margins and generate higher AURs. And fifth, we have an experienced and proven team with a track record of overcoming tough times.
Allison Coe has set herself apart from the competition by making the right moves in the past challenging times. We believe that the current environment will give us an opportunity to work again. We will work with discipline and build on our strengths to further improve our leadership in the coming years. He is now out of the hermit.
Harmeet Singh
Thank you yes. Before I get into the numbers, I want to start with three issues. We put a solid part. Net sales increased 7% in constant currency, reflecting the strength and durability of the Levi's brand. We achieved this result in addition to worsening economic and inflation headwinds, temporary supply chain issues related to the escalating pandemic in the United States, inability to fill orders, strong currency headwinds, and temporary supply chain issues. Of course, this affects consumer spending in the US and Europe. Thanks to our strong brand, diversified business model and operational flexibility, we were able to quickly manage costs and exceed expectations with adjusted revenues.
We've made progress on our long-term strategic plan, driving growth through exciting high-margin opportunities, our women's, exclusives, direct-to-consumer, international, and Dockers and Beyond Yoga. By controlling what we control, we focus on the short term, continue to invest in attractive long-term growth initiatives and return capital to our shareholders.
Now let's move on to some more financial details for the third quarter. Net revenue grew 7 percent, primarily due to higher AUR increases in the US, Asia and Latin America. Direct-to-consumer net revenue increased 8% on positive sales at our key stores and outlets, including in the US, driven by increased traffic, higher AUR and [UPT] (ph). And despite strong stores, our ecommerce business was up 16% and net revenue across all digital channels was up 15%.
Dollar-adjusted gross margin was 56.9%, up 390 basis points from 2019, but down 60 basis points from last year due to a 30 basis point negative foreign exchange impact and the impact of higher yields. Cost and lower sales at the full price, especially in the United States compared to last year, are partially compensated by higher prices and a favorable combination of channels.
ереходим SG&A. оректированные омерческие администравные асходы аа артал оставли $ 675, or 6% олчер, impal ей асти аших ожиданий. When we began to notice the impact of the deterioration of the macroeconomic situation, we minimized expenses in this quarter, cutting discretionary expenses such as business trips, deferrals of hiring and secondary projects, and we continue to do the same as at the beginning of the fourth quarter. As a percentage of revenue, adjusted commercial and administrative expenses were 44.5%, reflecting higher expansion costs and current strategic investments in IT and our consumer-oriented business, as well as lower-than-expected revenue.
оректированная аржа EBIT Ostavila 12.4%, а 240 азисных ов отченной основе на 200 азисных ов постояной. оректированный оказатель EBIT оларах еншился а 15% оченьном ажении а 8% в остоянной алюте. 7.2 % етьем артале о авнению 4.8 % в ом артале ошлого ода. The reduction of the effective tax rate compared to the updated annual forecast of the company for middle-aged children was caused by the expected acceleration of some tax initiatives.
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еперь оведу ас ерез евей оменты о егментам. апомним, егиональным егментам аши енды are Levi's, Levi's signature and Denise, а ому егменту енда are the Yoga Beyond Dockers. ерике а осла а 3%, mainly а ет олее оких AUR о аналам. Рост DTC на 8% был был был был программы и программы процессиональные программы, программы и программы, кожи от изгранция трафик и AUR, в новый магазины. Оптовый рост на 2% was caused by the international brand and Levi's in the USA, which, as Chip mentioned, was partially compensated by lower revenues from our low-cost brand. In general, in the segment of North and South America, growth was observed on all markets, while growth in the United States amounted to 2%, and in Latin America - a strong impulse, due to the strengthening in Mexico.
опе а ась а 9% остояной алюте, о ает егативное а а а 4% езултате отя акроекономическая Акторі, OM и Анамалия Ара, Игативіно овлиали а егион, Оги Аших Крапнихе. Комментарии к видео смотреть бесплатно
смотреть бесплатно Levi Ostates amim opulailarnim ovym endom ope. . Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Аоееошло Ао ектронаиорес оовля ол а 33%, о еефирова а ших оооративных аазинах аиксировала idamente щ.
атский егмент, а ением ая, ос а 68% общем осте о ему , о аве с ей, алайзией, ANZ, онезией аилеил аилеил елом, олее окий ост и олее окая валовая привели ему, ем ожидалось, еличению операционной ааржи 2000, амаржи о азисныхаржи очти азисныхаржи очти азисныхаржи очти амаржи очти а апункт очти азисныхапункт 2000, а апункт очти амапункт 2000, а апункт очти амапункт 2000, а апункт año 2000, año 2000, año 2000, año 2000, año 2000, año 2000 ая а ендов еличилась а 44% агодаря осту Dockers а 13% обавлению ከዮጋ ባሻገር።
ерейдем алансу ению енежных едств. ообщается, о акции осли а 43% олларовом ажении. оторые особствуют ому еличению, о оит отметить. оло ети ей атрат аномально ой ормализацией апасов ошлом оду. е одна еть еличения ана аерениеiante оследняя еть а обусловлена еличением оваров . онлайн, скачать видео -
По мере того, как вы создаете запасы на 2023 год и с нетерпением ждете возможности отреагировать на меняющийся спрос, мы сократили закупки запасов на первую половину 2023 года примерно на 25%. смотреть бесплатно ость ость остаются абильныmy. ом олге а онец артала азмере 372 онов олларов совокупной ости азмере 1,4 арда олларов еаш екоэффициенаш еоенаш екоэффициенаш екоэффициенаш екоэффициенаш е.оэффициенаш е.оэффициенаш е.оэффициенаш е.оэффициенаш е.оэффициенаш е.оэффициенаш е.оэффициенаш е.оэффициенаш е.овенаш እ.ኤ.አ.ኦ.ኦ.
Переходя к инвестициям в запасы и инфляцию, скорректированный свободный денежный поток, который мы определяем как денежный поток от операционной деятельности за вычетом основных средств, в третьем квартале был отрицательным и составил 12 миллионов долларов. ем не енее, ожидаем, оректированный ободный енежный отока етьем артале ернули акционерам около $74 . омпания атила енды азмере 0.12 оллара а акцию, о очти а 50% ольше, ем од азад. а артал акций ерно а 26 онов оларов. етвертом артале омпания объявила енды размере 0.12 ኦላራ አአክሽን, ак в ошлом артале. настоящее емя нас есть 690 онов ኦልላሮቭ
еперь ождению. емтт а, о ерены е шего енda оих с оребите ምክንያት, е н. И хотя мы по-прежнему наблюдаем рост нашего бизнеса, ориентированного на потребителя, в США в сентябре, который вырос на 10%, мы смягчаем наш прогноз на оставшуюся часть года, чтобы отразить сбой в цепочке поставок в Соединенных Штатах. СА እና አክሮኤኮኖሚችስኮእ አቬሌኒ።
22 ансовом оду ожидаем, о аявленная ая а астет 6.7% о 7%, оответствует ኤርኖ 11.5-12% ከ ой авыру. аш огноз ает ебя 3 ополнительные очки авления а оробку ередач тех ор, ак ездили е. овываясь а отчетах, еперь ожидаем, о ас ет окий однозначный оказатель, едний одростковый оказаель, оа ель, оа ель, оа ель, опа ель, опа ель, опа оказанизкийе ое анизкийе ое анизкийе ое анизкийе ое анизкийе ое анизкийель, опа ате еизменной алюте ожидаем, о ост оставит 20%. а ением FX оссии, ожидаем, опа ет асти окими емпами. еперь акже ожидаем, о орректированная азводненная на акцию оставит от 1.44 о 1.49 оллара, есмотря а е0,ение еа еличение аеа еение еа еение еа еение еа еличение еа еличение неа еличение неа еличение неа еличение еа еличерь Теперь акже ожидаем елом а есь од еперь ожидаем олее 250 онов олларов еблагоприятного алютных ов а 0.13 оллара аннайоектира анна оектира аннорроектира раннорроектира раннорроектира раннорроектира раннорроейа ранна одноннонайо онно анно онно анно онноннолло онно оллоектира ранна онноннолло онно оллектира азва однонно оллоектира анна однонно оллоектира азва одне
Чтобы представить наш последний прогноз скорректированной разводненной прибыли на акцию за весь год в контексте того, с чего мы начали в начале 2022 года, следует отметить, что неблагоприятные обменные курсы в России и Китае, по оценкам, повлияли на скорректированную разводненную прибыль на акцию более чем на 0 долларов США., 20. Сосредоточившись на том, что мы можем контролировать, построив этот бизнес на долгосрочную перспективу, нам удалось компенсировать почти 75% этого недостатка.
Мы ожидаем, что наша скорректированная валовая прибыль за полный год немного снизится по сравнению с прошлым годом на 57,9%, что почти на 400 базисных пунктов выше, чем в 2019 году. Изменение нашего предыдущего прогноза обусловлено валютными курсами и продажами по полной цене ниже, как мы ожидаем. более широкий рынок будет более рекламным до конца курортного сезона. В результате мы теперь ожидаем, что наш скорректированный показатель EBIT составит от 11,6% до 11,8% за год, что примерно на 60 и 80 базисных пунктов ниже, чем в предыдущем году, но со 100 до 120 базисных пунктов. базисных пунктов выше, чем в 2019 году.
Мы по-прежнему ожидаем 270 миллионов долларов капиталовложений в этом году, поскольку мы расширяем наш бизнес, ориентированный на потребителей, и продолжаем стратегические инвестиции в ИТ. Мы ожидаем, что наша эффективная налоговая ставка за весь год будет в середине 10-летнего возраста, что подразумевает однозначную среднюю налоговую ставку за четвертый квартал. Что касается конкретно четвертого квартала, это означает, что чистая выручка в четвертом квартале будет немного ниже в постоянной валюте и составит примерно 6% по отчетной основе.
Наш прогноз отражает более осторожный взгляд на проблемы цепочки поставок, особенно в США в четвертом квартале. Мы ожидаем, что скорректированная разводненная прибыль на акцию составит от 0,29 до 0,34 доллара. Как и в начале, я хочу оставить вас с некоторыми ключевыми моментами. Наше видение долгосрочного будущего остается неизменным. Хотя мы ожидаем, что в краткосрочной перспективе условия останутся сложными, мы уверены в своей способности использовать наши сильные стороны для обеспечения долгосрочного устойчивого и прибыльного роста и укрепления позиций.
Наши бренды и структурная экономика нашего бизнеса остаются такими же сильными, как и прежде. В дополнение к нашему устойчивому ядру, мы добиваемся значительных успехов в захватывающих высокодоходных областях роста, включая наши международные женские компании и бизнес, ориентированный непосредственно на потребителя. Мы сосредоточены на управлении контролируемым. Мы сокращаем дискреционные расходы, но не за счет каких-либо наших стратегических инвестиций, которые продолжают подпитывать наш ассортимент и позволят нам выполнить наш долгосрочный план роста.
И, наконец, мы сильны в финансовом отношении с прочным балансом и высоко диверсифицированной и масштабируемой бизнес-моделью, позволяющей генерировать денежный поток для реинвестирования в долгосрочный рост, продолжая при этом возвращать деньги нашим акционерам.
И с этим, оператор, я хотел бы открыть его для вопросов.
Оператор
Спасибо. Теперь слово открыто для вопросов. [Инструкции для оператора] Наш первый вопрос исходит от Боба Дрбула из Guggenheim Partners. Боб Дрбул, ваша линия открыта.
Боб Дрбул
Я думаю, Чип и Хармит, когда вы посмотрите на квартал, не могли бы вы рассказать немного больше, я не знаю, как географически, как он материализовался? Когда вы думаете об изменениях в квартале и в чем-то, как вы пропустили свои ожидания или просто динамику, которая сложилась? E sarei un po' -- sarei interessato a sapere come pensi che le scorte all'ingrosso rientrino nelle categorie con alcuni dei cambiamenti nella categoria di cui hai parlato anche durante il trimestre? Grazie.
Harmit Singh
Certo, Bob. Grazie per aver posto la domanda difficile. Ma come sapete, abbiamo consegnato un trimestre solido, in crescita del 7%. E Levi's nel secondo trimestre ha raggiunto un fatturato record per quel trimestre in un decennio. Ma hai ragione, abbiamo perso la nostra barra alta interna. Le cose sono progredite abbastanza rapidamente durante il trimestre. Nel momento in cui abbiamo visto venti contrari - venti contrari incrementali in FX, continue pressioni sulla catena di approvvigionamento e debolezza della domanda, specialmente nel mondo occidentale, ci concentriamo sul controllabile. Quindi, se pensi alle entrate, spezzerei la mancanza alle nostre aspettative interne nel modo seguente. Un terzo erano i cambi, un terzo erano i vincoli della catena di approvvigionamento che persistevano e, onestamente, limitavano la nostra capacità di soddisfare la domanda che è là fuori, quindi circa $ 30 milioni a $ 40 milioni di entrate e poi l'ambiente macroeconomico, che si è indebolito negli Stati Uniti ed Europa.
L'Asia e l'America Latina sono state le migliori dal punto di vista geografico. Sono cresciuti -- continuiamo con queste attività. Mentre pensiamo all'impatto sull'EPS e sulla redditività, direi, il calo delle nostre aspettative sui ricavi, che è di circa $ 0,12, ci concentriamo rapidamente sui controllabili tra i costi e altre cose come le aliquote fiscali. Le nostre aliquote fiscali nella metà degli anni dell'adolescenza, speriamo di sostenere a lungo termine negli anni dell'adolescenza. Quindi è qui che lo compenseremo.
Per quanto riguarda la tua domanda sul commercio all'ingrosso e all'ingrosso negli Stati Uniti, se pensi al trimestre, il commercio all'ingrosso negli Stati Uniti è salito a una cifra bassa. Se ti ritiri dal nostro canale di massa, ovvero due rivenditori che vendiamo, Signature e Denizen [indiscernibili] come menzionato da Chip, circa il 12%. Il commercio all'ingrosso statunitense in realtà è salito a metà delle singole cifre. Quindi nel complesso abbastanza bene. Monitoriamo i livelli di inventario commerciale, abbiamo misurato in mesi. E alla fine del terzo trimestre, i livelli delle scorte commerciali negli Stati Uniti con i clienti all'ingrosso erano in gran parte simili a quelli del '19. Ora, ovviamente, alcuni clienti sono più alti, alcuni sono più bassi, ma questo è il modo in cui vediamo i dati.
Bob Drbul
Grande. Grazie mille.
Harmit Singh
Grazie, Bob.
Operatore
Grazie. La nostra prossima domanda viene da Paul Lejuez di Citi. Paolo, per favore, vai avanti. La tua linea è aperta.
Paul Lejuez
Grazie ragazzi. Ero curioso di poter parlare un po' di più dell'inventario, magari se puoi fornire qualsiasi colore, magari suddividendolo per regione, top contro bottom, uomo contro donna. Penso, Harmit, che potresti aver menzionato qualcosa su quanto sia un prodotto senza stagione, ma anche curioso se pensi che ci siano posti in cui hai più di quanto vorresti, dove devi essere un po' più promozionale per cancellare attraverso? Grazie.
Harmit Singh
Sicuro. Quindi ho cercato di scomporre l'inventario, i driver di crescita nelle osservazioni preparate. Un terzo è stato in gran parte determinato dall'inflazione in COGS, che è in aumento, come sapete, il cotone era più alto. E una base di inventario inferiore rispetto all'anno scorso le cose erano molto limitate. E il terzo è stato in gran parte determinato dal fatto che abbiamo portato in anticipo - cose precedenti perché i tempi di consegna più lunghi così come l'ERP e il terzo sono in gran parte merci in transito. Per quanto riguarda le cose che stiamo facendo, Paul e il team, lo siamo -- e la maggior parte di questo inventario è in gran parte fondamentale, quindi possiamo lavorare per tutta la stagione, circa un terzo è stagionale. Non abbiamo un sacco di obsoleto, nel modo in cui lo abbiamo, lo stiamo riducendo e lo vendiamo. E questo ha influito sui nostri margini lordi nel terzo trimestre. Abbiamo pensato che i margini lordi basati sugli articoli che non venderemo a prezzo pieno avrebbero avuto un impatto di circa 100 punti base. Questo è probabilmente 130 punti base, 140 punti base di impatto. Lo abbiamo preso in considerazione anche nel quarto trimestre. Quindi, dove possiamo, ci muoviamo rapidamente in tutto il mondo per segnare le cose.
L'altra cosa che stiamo facendo è che abbiamo ridotto i nostri acquisti per la prima metà del 2023 alla grande. È -- in questo momento è in calo del 25% perché lo siamo -- poiché costruiamo l'inventario per l'installazione ERP è importante per ridurlo. In termini di suddivisione geografica, Paul, l'accumulo è in gran parte negli Stati Uniti, che sono principalmente un mercato centrale. E il motivo di quella build è anche determinato dal fatto che è in gran parte il core e l'ERP che sta aiutando a guidarlo. Sai cosa succede con l'implementazione ERP è che interrompiamo la spedizione per circa sei-otto settimane ed è per questo che stiamo cercando di risolverlo. E quindi al tuo punto, un terzo dell'inventario è stagionale, varia in base all'area geografica, ma gli Stati Uniti sono più centrali che stagionali.
Paul Lejuez
Fatto. Grazie ragazzi. Buona fortuna.
Harmit Singh
Grazie.
Operatore
Grazie. La nostra prossima domanda viene da Omar Saad di Evercore. Per favore, vai avanti Omar Saad.
Omar Saad
Grazie per aver accettato la mia domanda. Buon pomeriggio. Volevo vedere se potevate parlare del ciclo del denim, soprattutto per quanto riguarda le vostre prospettive per il prossimo trimestre. Stai vedendo un rallentamento, un rallentamento più ampio nel ciclo discendente? Ci sono altre aziende là fuori? E la categoria sembra anche essere un trend un po' più soft nella vendita al dettaglio. And especially in light of the reopening as people get dressed up again and maybe getting a little bit more dressy again, are you seeing that affect to casualization trend? Thanks.
Chip Bergh
Sì. We referred to some of this in the prepared remarks, Omar. But just to give you some real hard category data and I'm quoting NPD data. On a past 12 month basis, this is all through the end of August. On a past 12 month basis, total apparel is up 11%, denim is up 10%, By the way, we were up more than that on a past 12 month basis. And then in the script, we referred to the most recent three months through the end of August, so through July to August, where there was a significant slowdown with denim down mid-single digits and total apparel up 1%. Well, I'm not crazy about those numbers. What is good is, it does kind of validate the narrative that has been out there, which is that there has been this transitioning into more formal [indiscernible] as people go back to weddings and back into the office etcetera, etcetera. And it does -- it does validate that. And you can put our results up against that and we clearly outperformed denim and outperformed total apparel too during that same three month period of time.
I don't expect it's going to stay that way for long. And that data by the way is the US only data. The casualization trend we talked about this for quite some time is no longer just the US trend, it is a global trend, it is real. Our business skews to manage, men are going back into the office wearing jeans and we expect that denim is going to recover. I've said many, many times before we're the market leader and I believe it's incumbent upon market leaders to drive category growth. And we're going to continue to focus on doing that on the things that are within our control, driving innovation, we're going to continue to focus on innovation and continuing to support the business with strong marketing and marketing support and the combination of those things should drive growth.
Let's not forget too that weather probably played a factor during this period of time as well. And as the season changes, that's been always pretty favorable. So the last thing I would add is, Harmit referred to it in the script, but we did kind of put out there the September US direct to consumer sales, which were up double digits. So I don't think we're going to see the category get back to double digit levels of growth that we've seen over the last 12 months. But I do expect that the long term trend for denim is going to be kind of mid-single digit levels of growth over the long term. And the shorter the timeframe you look at, the more volatility there is in the data. And I suspect over time, we're going to see denim bounce back to that mid-single digit level over the next few months. So hopefully that addresses what you're looking for.
Omar Saad
Thank you for the color, Chip.
Operator
Thank you. Our next question comes from Matthew Boss of JPMorgan. Please go ahead. Your line is open, Matthew Boss.
Aida Orphan
Hey, Latif, let's go to the next caller and come back to Matt.
Operator
Okay. Our next caller comes -- our next question comes from Chris Nardone of Bank of America. Chris Nardone, your line is open.
Chris Nardone
Thanks for taking my question. Can you discuss expectations for the trajectory of your European business relative to your 3Q results even looking out to the first half of next year? And are there any particular countries that are showing notable weakness? And any difference in how you're thinking about wholesale and DTC in the region? That would be great. Thank you.
Chip Bergh
Yes, I would say, all cards on the table here, Chris. We're probably most cautious about the business in Europe as we look ahead. As we talked in the script, we saw some countries in Europe in Q3 performed quite well. Both the UK and Spain were up nicely. We also had a number of smaller markets across Europe also performed well [indiscernible] versus prior year on a constant currency basis. But there were other markets that were notably soft, particularly Germany and some of the -- some other markets in the north. If you strip out the impact of Russia, Europe was down mid-single digits 5% for the quarter. And as we look ahead, the guidance that we provided does kind of build in some cautiousness, I guess, with respect to Europe. And I suspect we'll see more as the winter begins to hit. Now what is the impact on the consumer over there as they face much steeper, not just much steeper inflation, but much steeper energy costs as well.
So the good thing about having such a broad global portfolio is, we've got other markets as Harmit said that are performing exceptionally well that can help to offset some of those softness. The brand is still incredibly strong in Europe, but we're seeing our wholesale customers being cautious to their open to buy budget and how they're planning inventory. And we are seeing, as I said, some bifurcation in our business even through the third quarter and we're kind of playing that through as we think about the future.
Operator
Thank you. Our next question comes from the line of Alex Stratton of Morgan Stanley. Your line is open. Please go ahead, Alex Stratton.
Alex Stratton
Thanks for taking my question. Can you just talk about the flexibility your wholesale partners have as it relates to canceling orders if they were to see more of a slowdown? So put differently, at this moment, can they cancel any of their fourth quarter orders, your fourth quarter, the first quarter or the second quarter and by how much? And also what kind of support would you guys offer [Technical Difficulty] should your retail partners have too much inventory as it kind of builds up in the broader space? Thank you.
Chip Bergh
Well, first I'll answer your last question first. As we said on the call, inventory levels across wholesale, broadly speaking, here in the US in particular are generally in line with where they were prepandemic. And so, relatively reasonable, now it does vary from customer to customer. Most customers are kind of on their own after they own the product. They manage their promotion and markdown budget. We support it, but we support it within traditional guidelines, so the [indiscernible] across the marketplace and are treating all customers equivalently.
In terms of canceling orders, we -- let's say, that it's a negotiation at the end of the day. If we've made products specifically for a customer, we hold the line very, very tight. So we do a number of products that are very, very specific to a particular customer. And if we're cutting product and making product for a specific customer, they own it at the end of the day. And we try to hold the line very, very hard on that. If it's product that is more marketplace product, or its product that we can put in our outlet stores, then it is a bit more of a negotiation. I hope that helps, Alex.
Alex Stratton
It does. Thank you.
Operator
Thank you. Our next question comes from Ike Boruchow of Wells Fargo. Your line is open. Please go ahead, Ike Boruchow.
Ike Boruchow
Hey, thank you. So Chip, I just wanted to go back to the prepared remarks and just digging a little bit more to me. So I think when you were speaking to the business at a high level, the business is being guided to negative constant currency growth in 4Q. I think you said you expect things to remain challenging over the next few quarters. I guess that I know you're not going to give us guidance for next year, but can you put some context behind that? How exactly we should think about the business based on the order book or any other visibility you may have right now? Thank you.
Chip Bergh
Sì. And by the way, guys, part of the reason I hesitated on that last call, the Blue Angels are in town and we just got straight a minute ago. So it's crazy. We've got jet slime right over our heads here. So I guess the way I would characterize the way we're looking ahead and I've talked about this a little bit with respect specifically to Europe. There's just a lot of uncertainty right now. I mean, forecasting during the pandemic was pretty tough, but it's pretty challenging right now to get a pretty good hold on where is the consumer heading and where is -- where is the business heading, especially with respect to customers and their opened [indiscernible] budgets. And that uncertainty is caused by some of the noise and confusion in a lot of the economic signals that we are getting. Inflation is still relatively strong.
You may see that begin to change over the next month or a couple of months, but we're at or near full employment and wages are growing, wages are growing across all incomes. Bank accounts are still reasonably healthy. Thanks to the pandemic impact, particularly in the middle and upper segments of income. So there's some data that you can look at and say things look pretty good, but there is a ton of uncertainty. Inflation continues to have more and more of an impact. As I said, in Europe, a lot of concern about what's going to happen during the winter with energy costs, particularly across that marketplace. But as I said, it is more of these Western markets where we're seeing these impacts. We have other parts of the business that are performing incredibly well. And even within our own portfolio in the West, our DTC business is performing pretty well. And so, our balanced portfolio, the strength that we're seeing in Asia, the strength that we're seeing in Latin America, the strength that we're seeing in our women's business, on Dockers, Beyond Yoga being completely additive at this point, we begin to lap that now. These are helping to offset some of these speed bumps that we're seeing in other markets. But it is too early to comment on guidance. I can tell you guys honestly hand on a Bible, I haven't even seen the numbers as we're developing our plan at this point. But I expect that we will be reflecting kind of the realities as we see it today with some of these uncertainties at least through probably the first half of next fiscal year. So I hope that helps without giving you any specific numbers.
Harmit Singh
Ike, the only thing I'd build on is from a cost perspective what we've seeing. So, Ike, on one hand, we built up inventory as we close the year, but we built up inventory when cotton was much lower than what it was for the first half of next year. As we see the future of cotton for the second half, cotton is down to a little over $0.80 which is the normalized. So there should be some tailwind there in 2023. The second is, some reduction in distribution costs and freight costs as we start thinking through the second half of next year. And so, I think those are the things that probably help. But as Chip said, we are here for the long term and we'll take that view. You saw our expectations we set in the Investor Day. And so we have a north start that we're working on.
Ike Boruchow
Thank you.
Operator
Thank you. Our next question comes from Laurent Vasilescu of Exane BNP Paribas. Your line is open. Please go ahead, Laurent Vasilescu.
Laurent Vasilescu
Good afternoon. Thanks for taking my question. Chip, I think you mentioned the value channel in the US was down 12% but ex that, the US wholesale was actually up mid-single digit for the quarter. How do we think about those guardrails for the fourth quarter? Do they converge? Does the value channel get a little bit better and the rest of the business gets a little bit worse. Any guardrails around that? And then I think you mentioned ex China, Asia was up 68%, I presume, obviously, that was on a [CC] (ph) basis. Just curious to know what you're seeing in China. I know you have a small business there, but any color on what you're seeing quarter to date trends would be very helpful. Thank you.
Harmit Singh
Sì. Why don't you [indiscernible] I'll just reference. So as we think quarter four and with quarter four we're saying constant currency slightly down growth and reported down 16%. Just give us one second to let the Blue Angels do their thing. So the FX had been very similar to quarter three and that's reflected in the difference in cost [indiscernible]. The change in the constant currency growth in Q3 down to -- slightly down in quarter four is driven by really two factors. One is, Asia has been growing at 50%, 60% is going to start lapping the normalized base. So we expect Asia to grow in the high teens, but not at this level. So that's one piece. And the second is, as we think about the Americas, a combination of the supply chain disruption we should think continues into Q4 and begins to improve Q1 onwards, as well as US wholesale down versus up. That's how we're building the expectation. We are working like crazy to deliver better numbers, but that's the expectation that we're setting aside.
Going to China, Chip, over to you. I think China was down in Q3, 17% but it's only 2%, 3% of our business. And as we said in Investor Day, we don't expect this business to be a major contributor to our growth longer term.
Chip Bergh
[indiscernible] You just answered it.
Laurent Vasilescu
Thank you very much.
Operator
Thank you. Our next question comes from Jay Sole of UBS. Your line is open. Please go ahead. Jay Sole, your line is open.
Jay Sole
Thank you so much. My question is, can you elaborate a little bit on the supply chain challenges you experienced in the quarter? And maybe help us understand maybe some of the differences that played out versus your expectation at the end of last quarter? Maybe you can start there that would be great. Thank you.
Chip Bergh
Jay, overall, what we say is, all the parts of supply chain are indeed improving. We're still feeling the impacts of disruption. We additionally have some congestion within our logistics and distribution network due to inventory build that we did to protect Q1 revenue as well as our ERP transition. With this congestion comes a lot of efficiency in our distribution network. And so we think Q4 will be the peak and we expect to start improvements in Q1. And to offset this and build, as I said earlier, we're kind of reducing our H1 by big time. And so, that by the end of quarter two inventory levels returned back to normal. And the congestion is largely between the ports, the transloading and goods on our distribution center lots. So we're working through it and the majority of it is largely in the US. And US primarily a core market, so we're working through that. We're working through the same with our customers to ensure there's minimal disruption, but it does hurt overall revenue.
Harmit Singh
Sì. The only thing I would add is, you probably heard others talk about supply chain improving significantly. Their starting point was a lot different than our starting point. Our supply chain issues are kind of in line with the issues that we had last quarter. Two to three points worth of growth left on the table due to supply chain issues. We didn't have the major supply chain issues the way some of our peers did nine to 12 months ago, because our agers spread across more baskets than relative to our peers who have so much of their supply chain concentrated in one or two markets. So the change on change is not as significant for us as it has been for some of -- others.
Jay Sole
Got it. Okay. Thank you so much.
Operator
Thank you. Our next question comes from Dana Telsey of Telsey Group. Please go ahead. Your line is open, Dana Telsey.
Dana Telsey
Good evening, everyone. As you think of the current macro environment and what's happening in the channels, how are you thinking of the level of promotion, whether it's by your own DTC, e commerce or store? What's happening on the wholesale side by region also? And with the offsets on the gross margin side, are there offsets in terms of the magnitude whether it happens to be freight or whether it happens to be anything else that we should note? How do you see the gross margin cadence evolving? Thank you.
Harmit Singh
Sì. So, hi, Dana. Thanks for the question. Our gross margin -- So when we started the second half of the year, I think we've publicly said we've built in probably 100 basis points contraction in gross margin in the second half, similar in Q3, similar in Q4. And that was really saying, okay, what percentage of our products we will be not selling at full price. As the quarter progressed, promotion levels increased, we had some seasonal product that we wanted to markdown in the western part of the world. Quarter three, the gross margin impact was about an additional 30 basis points. And as you look at quarter four, it's about 30 more. Because we think the environment is a little bit more promotional and we've got in some inventory that we'd like to markdown and sell. So that's how we're thinking about it.
At the end of the day, our gross margins for the year will be slightly lower than last year, but still significantly higher, maybe close to 400 basis points relative to '19. So we're predicting the premise that we continue to grow our gross margins in the long term. Does that help you?
Dana Telsey
Sì. And as you see your own channels with stores and online, how do you see the cadence there?
Chip Bergh
So I'll take that one. So let's put it this way, Dana. We're not going to be meeting an aggressive promotional environment, but we're not going to be left uncompetitive. Just as we did in the third quarter, when we saw that the promotional environment was heating up, we took steps to be competitive, but we're not in a place where we've got to go out and actively liquidate a lot of inventory. So we're not going to lead it, but we're not going to be left uncompetitive. That may mean -- that may not mean that we're going to go all the way to 7% off if everybody else is going to 7% off. That may mean that we go for fewer weeks, but we'll be competitive. But we're also -- at the end of the day, we are about strength of our brand and an overly promotional -- hot promotion brand is not good for brand integrity. And so, we're going to do our best to protect gross margin without being uncompetitive in the marketplace.
Dana Telsey
Got it. And just on marketing, what are your plans for marketing and marketing expense as we go through this time period?
Harmit Singh
Sì. I probably should have hit this earlier, but whether you're thinking about Q4 or thinking about next year. We're going to continue to invest in the long term and we're going to continue to make investments in DTC and e-commerce, because those are strategic for us and we're going to continue to invest in building our brands. [indiscernible] .
Dana Telsey
Thank you.
At this time, I'd like to turn the call back over to Chip Bergh for closing remarks.
Okay. Latif. Okay. Thanks everyone for dialing in. And we will talk to you again at the end of January. So I wish you all happy holidays, a good fall, and happy holidays, and we'll speak with you at the end of our fiscal year in Q4 in late January. Have a good holiday and thanks for dialing in today, everyone.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
