Prepared remarks
Good day, ladies and gentlemen, and welcome to the Levi Strauss and Company Second Quarter Fiscal 26 Earnings Conference Call for the period ending 05/31/2026. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is 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, Vice President of Investor Relations at Levi Strauss and Company.
Thank you for joining us on the call today to discuss the results for our second quarter of fiscal 26. Joining me on today's call are Michelle D. Gass, our President and Chief Executive Officer, and Harmit J. Singh, our Chief Financial and Growth Officer. We would like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our website, investor.levistrauss.com. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and information provided is based on continuing operations. Finally, this call 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 allow others to have their questions addressed. And now I would like to turn the call over to Michelle.
Thank you, and welcome, everyone, to today's call. We are pleased to report another strong quarter with Q2 exceeding expectations across the top and bottom line. These results highlight the strength of our business model, underpinned by the enduring power of our iconic brand and how we are driving growth across markets, channels, categories, and consumer demographics. The progress we are delivering today is the direct result of the strategic choices we have made to sharpen our focus and unlock the full potential of the Levi's brand—choices that have positioned us to capture our highest-return growth opportunities. As we continue to evolve into a DTC-first lifestyle company, we are driving more consistent and faster growth, expanding our addressable market, and improving our profitability. Quarter after quarter, our results demonstrate that our strategies are working and momentum is building. We believe we are still in the early innings of unlocking the full opportunity ahead, with more ways to win than ever before. Let's now turn to the details of the quarter. As a reminder, all numbers Harmit and I will reference are on an organic basis. We delivered solid top-line performance this quarter, with organic net revenues up 6%. Our international markets continue to demonstrate strong momentum, led by a 12% increase in Asia, while the U.S. delivered a 6% increase. Our direct-to-consumer business continues to lead our growth, with revenue up 8% and comparable sales up 6% in Q2, delivering our 17th consecutive quarter of comp growth. Global wholesale increased 3%, led by strength in the U.S. wholesale channel. Our evolution into a denim lifestyle brand is enabling us to continue to drive outsized performance in women, up 11% in the quarter. We further extended our leading market share position in both men's and women's, reflecting the strength of our brand, impactful marketing, and a steady pipeline of product innovation. Importantly, top-line momentum translated into strong bottom-line delivery, with margin expansion and strong earnings growth. On the strength of our performance, we are raising our full-year sales and EPS guidance. Harmit will share more shortly. I will now walk you through highlights from the quarter in the context of our strategies. Our first strategy is to be brand-led, powered by a best-in-class global marketing team that moves with agility and keeps Levi's firmly at the center of culture around the world. In Q2, we continued to build on our global 'Behind Every Original' campaign following its successful launch at the Super Bowl earlier this year. The campaign features a dynamic mix of cultural voices across music, sport, and fashion, including Doechii, Questlove, and basketball superstar SGA. In line with our strategy to align global campaigns with local relevance, we expanded the talent roster to include top local talent across key markets, including Mexican pop star and actress Belinda, and leading Bollywood actress Alia Bhatt. We also activated our collaboration with K-pop superstar and Levi's brand ambassador Rosé through pop-up shops in key Asian markets, reinforcing our focus on growing the women's business in the region. Ahead of the global soccer championship, Levi's launched denim product collaborations with the U.S., Mexico, England, and France football federations. When the soccer championship came to Levi's Stadium in June, our team turned a branding restriction into a viral marketing campaign, demonstrating our ability to operate at the speed of culture through bold, agile execution. This drove the most-viewed, shared, and commented post in Levi's history, generating approximately a billion press impressions. Now turning to product. As I mentioned earlier, we remain in the early innings of capturing a significant opportunity ahead, and our product engine rooted in denim is central to unlocking that growth. For more than 150 years, denim has anchored the global wardrobe, outlasting virtually every trend in fashion. It began as practical workwear and has become a global symbol of style and self-expression. Today, the continued trend toward casualization is a tailwind fueling denim growth globally, and the category is projected to grow mid-single digits annually through 2030—outpacing historical apparel growth. As the global market share leader in denim, Levi's is uniquely positioned to capture this opportunity, and we are accelerating that capture through a steady pipeline of innovation in fits and fabrics. In Q2, our bottoms business grew 6%, driven by strength in core fits with newness adding incremental momentum. Looser silhouettes continued to deliver solid growth. Our 'May for Her' and '05/2001 Loose' for him were key standouts in the quarter, reinforcing both the longevity and relevance of our core icons. We are also seeing continued strength across a range of other silhouettes, including our Cinch Baggy franchise, wide leg and low-rise women's, and relaxed and boot cut in men's. Importantly, our core fits across skinny, slim, boot cut, and straight continue to make up the majority of our bottoms business, reflecting our healthy and diversified bottoms portfolio. Our push into categories beyond denim bottoms has expanded our total addressable market and contributed roughly a third of our top-line growth in the quarter. This reflects our strong progress in expanding our assortment for summer, creating more warm-weather head-to-toe offerings for our consumers. We are seeing strength across key summer categories, including lightweight denim, linen shirts and dresses. Our expanded shorts assortment is also resonating, with the category up 11% in the quarter. In women's, we also saw exceptional strength in seasonal trends, including white denim, which grew 70%. Strong in-store execution is bringing these assortments to life through compelling merchandising, outfitting, and seasonal storytelling. We are making great progress in our evolution into a true head-to-toe denim lifestyle destination, and our tops business remains a meaningful way to expand our total addressable market. In Q2, tops were up 5%, or up 7% when excluding the impact of the European distribution center transition last year. Key-to-retail categories like blouses, wovens, sweaters, and polos are driving strong growth, outpacing legacy categories like graphic tees. As these legacy categories continue to mature within our portfolio, we are actively refining how we invest across our traditional and newer styles to maximize the opportunity, and we expect the business to accelerate in the second half of the year. BlueTab continues to gain traction as the most premium expression of our brand. Importantly, BlueTab is introducing the Levi's brand to a new consumer, and we are already seeing early share gains at the premium end of the category. While still in the early stages, we see significant runway ahead as we scale the business, unlocking a sizable premium segment that remains underpenetrated for Levi's today. Now shifting to our strategy to become a best-in-class DTC-first retailer. Our global direct-to-consumer business was up 8% in Q2 and comprised 51% of total company revenue in the quarter. Comparable sales were up 6%, underscoring the strength of our retail execution, with gains across key store KPIs, including UPT and AUR. Our continued efforts to premiumize the site experience and elevate our online assortment drove another strong quarter in our e-commerce channel, up 17%. E-commerce growth was fueled by solid performance across all key metrics, including increased traffic, better conversion, higher UPT, and AUR growth as we reduce promotional activity on our site. This business has grown almost 60% over the past three years, yet still only comprises approximately 12% of our overall revenues—remaining underpenetrated versus peers and representing a meaningful opportunity for continued growth. This quarter, we welcomed three million new members to our loyalty program, bringing global membership to nearly 50 million. We are continuing to enhance the program through more personalized experiences and by leveraging our data to deliver more relevant and connected interactions. Global wholesale was up 3%, reflecting strength across customers in U.S. wholesale. The women's business was a particular standout and sell-through trends across the U.S. wholesale channel remain healthy. Globally, our wholesale partners are increasingly leaning into our diversified lifestyle assortment, reflecting strong consumer demand and confidence in our broader offerings. Now turning to our third strategy, powering the portfolio. While international represents approximately 60% of our business today, we see significant runway ahead with many markets still early in their growth journey. This quarter, international revenue grew 6%, led by double-digit gains in Asia and Latin America. This year, we celebrate 60 years of the Levi's brand in Mexico, our second-largest market globally and a key contributor to international performance with Q2 growth of 15%. Supported by strong brand equity, Mexico remains both a meaningful revenue driver and a cultural and strategic hub. Across Latin America, momentum is accelerating, with double-digit growth led by Brazil, The Andes, and Colombia. We see continued opportunity to build on the strength through store openings, e-commerce, and wholesale expansion. In Asia, performance was strong across markets with Q2 growth led by Turkey, Japan, and India. In China, we are beginning to see signs of progress, supported by new leadership and improvements in product and execution. While still early, we are encouraged by a return to growth and improving underlying trends. Signature, our value-focused brand, grew at a low single-digit rate in Q2 and was up 9% for the first half of the year. We expect growth to continue and build through the second half of the year, supported by an expanded lifestyle assortment including a broader tops offering. Beyond Yoga was up 16%, led by strength in e-commerce. Momentum continues to be fueled by newness and expansion into lifestyle categories, including the launch of a new linen capsule which quickly became one of the brand's top-selling collections. In closing, this quarter again reinforces the strength of our strategy and the progress we are making. We have sharpened our focus, elevated the Levi's brand, and raised our level of execution—building a stronger and more durable business. While we remain mindful of the external environment, the momentum we are seeing across our strategic priorities gives us confidence in the path ahead. I want to thank our teams around the world for their relentless focus on the consumer and the disciplined execution that continues to drive our results. With that, I will turn it over to Harmit.
Thank you, Michelle. Q2 was another strong proof point that our profitable growth algorithm is working. We exceeded expectations on both the top and bottom lines, expanded margins, delivered strong EPS growth, and generated significantly stronger free cash flow. This quarter, once again, reflected the breadth of our growth across wholesale and DTC, the U.S. and international, women's and men's, tops and bottoms, units, and AUR. Our recently expanded total addressable market contributed roughly one-third of revenue growth, reinforcing the traction of our denim lifestyle strategy. Improving flow-through remains a priority, and Q2 showed clear progress. Gross margin expanded despite pressure from tariffs, and disciplined SG&A management converted top-line growth into stronger-than-expected bottom-line delivery. Given our solid first-half performance and business momentum, we are passing the entire Q2 beat and raising our full-year revenue and EPS outlook for the second consecutive quarter. I will walk you through the details shortly. Before discussing Q2 results, I will update you on two infrastructure initiatives that support our transformation into a DTC-first lifestyle company. First, an update on our distribution network transformation. We completed the remap of Europe to an omnichannel distribution network at the end of Q2, consolidating e-commerce fulfillment into our centers in Germany and the U.K. We are seeing benefits in operational efficiency, distribution expense leverage, and profitability in Europe. In the U.S., we remain on track to complete the transition of Hebron, our own distribution center, into the new network by the beginning of Q4. The transition has taken longer than planned as we balance strong demand with the operational shift. As we exit parallel operations and consolidate into the new network, we expect to eliminate duplicative cost, simplify the operating model, and improve inventory and service levels. We also reached a major milestone in our global ERP transformation, migrating Asia and Beyond Yoga onto a new global platform after the successful transition in North America. Europe and the remaining Latin American countries are on track for completion by mid-2027. Once complete, the company will operate on a single ERP enabling faster decision-making, supporting our DTC-first model, all while creating the foundation to scale AI and automation globally. Now moving to our Q2 results. Net revenues increased 8% reported and 6% organic, despite a 2-point drag from last year's European distribution center transition. Gross margin was better than expected and expanded 10 basis points to 62.7%. Lower product costs and pricing actions were tailwinds; tariffs and foreign exchange were a headwind in the quarter. Adjusted SG&A increased 6.5%, primarily reflecting higher selling expenses and unfavorable foreign exchange. As a percentage of revenue, however, adjusted SG&A leveraged 80 basis points, underscoring the discipline and scalability of our cost structure. As a result, adjusted EBIT margin expanded 70 basis points to 9%, reflecting our ability to convert top-line growth into margin expansion. Adjusted EBIT dollars also grew 18%, much faster than revenue growth. This flow-through drove adjusted diluted EPS of $0.28, ahead of our guidance, and represented growth of 27% year over year. We ended Q2 with inventory down 7% with a healthy mix of current product across regions, reflecting stronger inventory management and continued progress in reducing excess and obsolete. For the full year, we expect inventory dollars to be slightly above last year but below expected sales growth, positioning us to service back-to-school and holiday demand. Building on a strong Q1 performance, adjusted free cash flow in Q2 increased nearly 80% year over year to $231 million, driven by business momentum and improved working capital. Turning to our capital allocation strategy. Our approach remains disciplined and balanced—prioritizing high-ROI growth opportunities while returning at least 55% to 65% of free cash flow to shareholders through dividends and opportunistic share repurchases. In 2026, our capacity to return capital is even stronger, supported by asset sales proceeds and execution of our ASR. Consistent with this commitment, we are increasing our Q3 quarterly dividend by $0.02 to $0.16 per share, doubling our annual increase over each of the past two years and reflecting confidence in our earnings and free cash flow generation. Now let's review the key highlights by segment. The Americas delivered 7% growth, with the U.S. up 5% on momentum in both DTC and wholesale. Operating margin declined 40 basis points, driven by the unfavorable impact of tariffs and partially offset by cost initiatives and pricing actions. Europe declined 1% in Q2, reflecting last year's distribution center transition while first-half revenue grew mid-single digits consistent with our full-year guidance. Underlying trends remain healthy with DTC up 7% and strength in key markets including Germany and the U.K. Q2 operating margin increased nearly 400 basis points to 21.1%, driven by gross margin strength and lower distribution expenses. Looking ahead, we are encouraged by high-single-digit wholesale preorder growth for H2. Asia net revenues increased 12%, fueled by double-digit growth across both DTC and wholesale. Performance was strong across markets as consumers continue to gravitate toward our expanded denim lifestyle assortment. Operating margin was 15%, expanding 350 basis points versus prior, driven by revenue acceleration, gross margin strength, and SG&A leverage. Now turning to guidance. Based on our strong first-half performance and business momentum, we are raising our full-year outlook. The tariff environment continues to be uncertain, and our updated guidance continues to assume incremental U.S. tariffs on imports from China at a 30% rate and the rest of the world at 20%. Our guidance does not assume any benefit from potential tariff refunds which are approximately $80 million paid today. For the full year, we are raising our revenue outlook and now expect reported net revenues to increase 7% to 7.5% and organic net revenues to be up 5.5% to 6%. This assumes foreign exchange is a 150-basis-point tailwind to sales versus our previous expectation of a 100-basis-point benefit, all of which has already been realized in H1. Gross margin is now expected to expand approximately 10 basis points versus prior year, driven by the structural drivers of our business—higher DTC, women's, and international—along with reduced promotional levels and cost efficiency. We expect adjusted EBIT margin to be 12% for the full year, a continuation of the sequential margin improvement we have seen over the past several years, while taking proactive decisions to reinvest in the infrastructure investments that I highlighted earlier and in net-new store openings. We are raising our adjusted diluted EPS expectations by $0.04 to the range of approximately $1.46 to $1.52, up from our previous range of $1.42 to $1.48. With regards to store openings, we continue to expect to open 50 to 60 net-new doors this year with the majority of net openings weighted to the second half of the year. For Q3, we expect reported and organic net revenues to be up 4% to 5% for the quarter, reflecting no expected benefit from foreign exchange. Gross margin is expected to expand around 10 basis points versus prior to 61.8% despite a roughly 70-basis-point FX headwind. Adjusted EBIT margin leverages approximately 10 basis points to 11.9%. This translates to an adjusted diluted EPS of approximately $0.34 to $0.36, which includes a $0.02 to $0.03 headwind from a higher tax rate and foreign exchange impacting gross margin. A few comments on the phasing of EBIT margins in the second half. H1 margins adjusted for the Q1 timing of A&P were up 30 basis points. We expect that progression to continue into Q3. The EBIT expansion becomes more pronounced in Q4 as we begin to lap the full impact of tariffs in Q4 last year, less FX pressure on gross margin, the normalization of A&P spending, reduced duplicative distribution cost, and continuing to drive SG&A discipline. The underlying message is consistent: we are converting revenue growth into higher earnings and stronger profitability. As a result, we expect to end the year with adjusted EBIT margins up 60 basis points, continuing our trajectory over the last three years. In closing, our results demonstrate a healthy long-term growth algorithm—mid-single-digit revenue growth, expanding margins, strong earnings acceleration, healthy cash flow, and disciplined capital return. With a strong first half and positive business trends, we are passing through the Q2 beat and raising a full-year top-line and bottom-line outlook for the second consecutive quarter. We remain confident in our path to $10 billion in revenue and 15% operating margin, supported by an expanded TAM and a clear roadmap for profitable growth. With that, I will open the line for Q&A.
Questions and answers
Thank you. The floor is now open for questions. Due to time constraints, the company requests that you ask only one question. If you have any additional questions, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by pressing star 11 again. Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Your line is open, Laurent.
Good afternoon, Michelle and Harmit. Thanks for taking my questions. I have two questions. First, on U.S. wholesale: I think you mentioned Signature grew high teens last quarter and I think it was up low single digits this quarter. I'm curious to know what you are seeing with the more value-based consumer and the channel overall. Second, on Europe: Europe DTC grew 7% organically this quarter versus 5% last quarter, so DTC is actually accelerating. How should we think about European DTC for the third quarter? And are you still confident that Europe as a whole should grow mid-single digits in the second half with prebooks still up high single digits? Thank you very much.
Thanks, Laurent, for your questions. I will take the first one on Signature and then turn it over to Harmit on Europe. Overall, we see Signature as an important business for us. It is on the smaller side, about $300 million annually, and we do expect it to accelerate in the back half. When you look at this quarter relative to Q1, taken in total Signature was up 9% in the first half. We see the second half being either high single digits or low double digits, and we see a lot of opportunity. It is a solid, resilient business. The team is taking a page out of the Levi's Red Tab playbook and really leaning into newness and lifestyle offerings, and that is resonating. We see opportunity in tops, in the women's business in particular. In Signature, women's is only 30% of the business, and so we see outperformance there with women's and we expect that to continue. Regarding the health of the more value-oriented consumer, we are optimistic. Overall, our consumer is proving to be quite resilient. Signature satisfies an important part of our segmentation strategy for that value-oriented consumer, and we are seeing strength across our core consumer and even on the premium side. With wholesale, you will always see some variations quarter to quarter; it is important to look at it in the totality. Like I said, 9% first half and we are expecting that to accelerate in the back half of the year. Over to Harmit on Europe.
Thanks, Laurent. Europe was up 5% in the first half, which is consistent with our full-year guide. Demand remains strong and the business is driving margin expansion as highlighted in our prepared remarks. The strength is across most markets, including the U.K., Germany, and Italy. If you look at the impact of the Dorsten distribution center transition last year, the drag in Q2 was about eight percentage points. So Europe, instead of minus 1%, would have been plus 7% absent that transition timing. Regarding DTC, DTC has accelerated in Q2 and for Q3 and Q4 we expect DTC to be mid-to-high single digits. Wholesale is still a big piece of the business; our prebooks are up high single digits, reinforcing confidence in H2 and the full-year outlook. Overall, Europe is in a good spot—gross margins are up, distribution costs are down, and operating margins are expanding significantly. We remain confident in the European outlook.
Thank you. Our next question comes from the line of Matthew Boss of JPMorgan. Please go ahead, Matthew.
Thanks, and congrats on another nice quarter. Two-part question. Michelle, 6% organic revenue growth on top of 9% growth a year ago—could you speak to areas of strength that you are seeing across categories and elaborate on the expansion in the brand's total addressable market that you cited as tied to the expanded assortment? And Harmit, could you walk through drivers behind the sequential moderation that you embedded in the back-half revenue outlook? I think it is roughly 4% relative to the front half up roughly 8%. Any change in consumer behavior to date that you have seen across regions, or is this just taking a prudent outlook?
I'll kick it off. What is exciting is we are seeing broad-based growth—across channels, genders, categories, and geographies—which is a direct reflection of our strategy. If you take channel as an example, both DTC and wholesale were positive in the quarter: DTC up 8%, wholesale up 3%. While wholesale contributed more to the beat, we expect DTC to be the outperformer as we continue to expand that opportunity. By gender, we had a fantastic quarter in women's at 11% and steady growth in the men's business. We continue to gain market share in both. By category, we saw growth in both tops and bottoms: bottoms up 6% and tops up 5% (7% excluding the European distribution transition). Newness is fueling momentum on both tops and bottoms—looser fits, baggy styles, and new fabrications in bottoms, and blouses, button-downs, polos, and sweaters driving tops growth. Geographically, the U.S. was up 6% overall, Levi's was solid up 5%, and international was up 6%, with Asia at 12%. This broad-based performance is driving our growth and reflects the expansion of our addressable market as we pivot from being primarily a denim bottoms company to a head-to-toe denim lifestyle brand. We believe the expanded TAM is significant and we have more ways to win than ever before.
On the moderation between the first half and the second half, it is primarily prudence and conservatism in our outlook. Our consumer continues to be resilient—demand is broad-based across channels, geographies, and categories. Two-thirds of our growth is being driven by units, largely from the expanded TAM and underpenetrated areas such as women's and tops. We are seeing strength across value, core, and premium. The moderation built into H2 guidance versus H1 is not due to a deterioration in the business today; it's a prudent posture given macro uncertainty and the seasonality of the year. We've beaten our numbers in recent quarters and raised guidance twice; our aim is to continue to outperform. Overall, we feel good about the outlook and the path to the full-year guide.
Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Please go ahead, Dana.
Congratulations and nice to see the progress, everyone. On Beyond Yoga, you mentioned strength in e-commerce. How is Beyond Yoga doing in the stores? What do you see as the game plan going forward? Also, the marketing has been very effective—how are you thinking about marketing for the back half of the year? Any differences by region or channel? Thank you.
Thanks, Dana. On Beyond Yoga, we are pleased to see continued double-digit growth—16% in Q2—driven by product expansion into lifestyle beyond traditional activewear. The linen capsule introduced this summer performed particularly well. E-commerce is the largest part of the business today, but we are optimistic about a multichannel approach. We are in the early days of the store rollout with fewer than 20 stores, but the newer, slightly larger concept stores—designed to bring the full brand expression to life—are performing well. Men's is an untapped opportunity for Beyond Yoga and as we expand the men's category, we are seeing consumer response. On marketing, our team continues to deliver and we will remain brand-led. We find moments to show up at the center of culture globally and locally, and the World Cup example at Levi's Stadium is a great case of agile execution that generated massive reach. We will continue global campaigns with local activations—for example, Rosé in Asia—and we will keep investing where we see cultural resonance. The team will tailor marketing by region and channel as appropriate, but the brand-led approach with high cultural relevance remains core to our strategy.
Our next question comes from the line of Jay Sole of UBS. Your line is open, Jay.
Great. Thank you so much. My question is on the ERP implementation. You have made great progress and it sounds like it will be completed by mid-2027. Can you talk about what the ERP completion unlocks for the company, especially as you continue to move toward a DTC-first business, and what kind of impact it might have on margins when the ERP is implemented and the distribution centers operate as planned? Thank you.
I'm very bullish on this initiative. I was an executive sponsor for a couple of years and the team's done a phenomenal job. This is a business-led, technology-enabled transformation that moves us from a disjointed, highly customized set of ERPs to a standardized cloud-based ERP. The success of the project is about unlocking data and giving users access to timely information—so you can see store sales, distribution center movements, fill rates, and service levels in real time. North America is live; we've migrated Asia and Beyond Yoga and are on track to complete Europe and remaining Latin American countries by mid-2027. The prize is faster decision-making, better inventory and service management, and the foundation to scale AI and automation globally. That capability will enable more efficient operations and should flow to improved margins over time as we leverage better data to optimize inventory, supply chain, and customer experiences.
Our next question comes from the line of Rick Patel of Raymond James. Your line is open. Suraj Malhotra is on for Rick. Please go ahead.
Hi. This is Suraj Malhotra on for Rick Patel. Thank you for taking our question. How much were AUR and units up in Q2? Can you double-click on the AUR drivers as we think about the split between pricing, promotions, and sales mix? Thanks.
Suraj, the good news is both units and AUR were up. For the quarter, roughly two-thirds of the growth was contributed by units and one-third by AUR. If you look at the trend over the last year, we have been roughly in that range with some quarters closer to 50/50. We expect for the year a more balanced contribution between units and AUR. The drivers of AUR growth include a higher mix of full-price selling as we reduce promotions, continued growth in DTC which has higher AURs than wholesale, premium offerings such as BlueTab at a higher price point, and category expansion in areas like women's where AURs can be higher. So the AUR increase is a mix of less discounting, improving mix toward higher-price assortments, and channel mix favoring DTC.
Our next question comes from the line of Ike Boruchow of Wells Fargo. Your line is open, Ike.
Hi, Michelle, Harmit. Two questions on margin. First, in Q2 revenue was about 300 basis points better but operating margin only hit the high end of your guide—could you talk through any puts and takes that happened during the quarter? Second, the third-quarter guide implies a meaningful step-up in expense leverage into Q4. Can you walk through the moving pieces in SG&A that create that scalability when you get to Q4 versus Q3 and Q2? Thanks.
Ike, good questions. For Q2, gross margin was strong and expanded, but adjusted SG&A increased 6.5%—about a third of that increase was due to foreign exchange, so the percentage leverage was less pronounced on a reported FX basis. Despite that, adjusted EBIT margin still expanded 70 basis points. Regarding the cadence in the second half and the step-up into Q4, there are several factors driving that scalability. First, volume leverage: the seasonality of the business means dollar sales are higher in H2, which provides operating leverage. Second, A&P timing: A&P was higher in Q1, so A&P as a percentage of sales will be lower in Q4 year over year as we normalize spending. Third, distribution savings: as we exit duplicate distribution operations and consolidate into the new network—Europe is a good example—distribution expense will come down, and the U.S. transition (Hebron) will continue to taper through Q3 into Q4. Fourth, tariff dynamics: we begin to lap the full impact of tariffs in Q4 last year, which helps gross margin comparisons. Combined, these factors create the pattern of margin expansion that is more pronounced in Q4 than Q3. Those are the key drivers of the expense leverage you referenced.
Our next question comes from the line of Kendall Toscano of Bank of America. Your line is open, Kendall.
Two questions. First, on tariffs: last quarter you outlined a potential benefit of $35 million to COGS and $0.07 to EPS for the full year if lower rates persisted. Did any of that benefit show up in Q2 and what would you expect for Q3? I know it's not included in guidance, but you probably have more visibility now. Second, on the U.S. DC transition: you mentioned it's taking a bit longer than anticipated. Can you elaborate on the timing and the magnitude of cost savings you now expect for 2026 versus what you initially anticipated? Thanks.
Kendall, I'll take both. On tariff refunds and timing: we have approximately $80 million of potential tariff refunds, but those refunds go through customs reconciliation and timing is still somewhat uncertain. We have not built those refunds into our guidance and have not recognized them in our results, though they represent potential upside if realized. Regarding the $35 million scenario tied to lower tariff rates, the benefit is phasing through given our inventory turns; it takes time for lower-cost inventory to flow through the P&L. Q2 was marginal in contribution from that effect and Q3 could see a bit more, but the environment remains fluid. That's why we maintained a conservative tariff assumption in our guidance. On distribution cost savings and the U.S. DC transition: distribution cost benefits are already visible in Europe with the omnichannel setup. In the U.S., the transition of Hebron into the new network is on track to be completed in the second half, with tapering in Q3 and consolidation by the beginning of Q4. The absolute incremental costs related to timing are modest—a few million dollars—while the long-term benefit is better inventory flow, lower duplicative costs, and improved service. Overall distribution expense was roughly 20 basis points better in H1 and we expect more benefits as transitions complete in H2 and into Q4.
Our next question comes from the line of Bob Drbul of BTIG. Your line is open, Bob.
Hi. Thanks. The World Cup marketing around Levi's Stadium was spectacular—well done. Two questions: first, where have you brought the BlueTab business so far as you have expanded it and what have you learned? Second, within the denim category, are you seeing any changes to the promotional environment for the category? Thanks.
Thanks, Bob. On the denim category and promotions: we are staying very close to the market. Overall, our consumer is proving resilient and much of our growth is units driven. We are reducing promotional activity in certain channels and increasing full-price selling, particularly online, which is supporting AURs. Historically, denim has been a stable category and continues to be a wardrobe staple. We are gaining share and the category outlook over the next several years remains positive. Regarding BlueTab, we are optimistic. BlueTab is the premium expression of Levi's, targeting higher price points—bottoms in the $200 to $350 range and truckers and outerwear at higher levels. It's a relatively small business today but growing quickly—up about 40% in the quarter and the prior quarter. We're learning that BlueTab should be a lifestyle offering, not just premium denim bottoms. You'll see a broader lifestyle assortment including tops and sweaters as we scale. We're also refining merchandising—how and where BlueTab is presented in stores and online—and the early consumer response is encouraging. We see a long runway for BlueTab to become a meaningful premium business for Levi's.
Our next question comes from the line of Paul Lejuez of Citi. Tracy Kogan is filling in for Paul. Your line is open.
Thanks. I wanted to follow up on quarter-to-date performance. You said you're seeing continued momentum quarter to date—did you mean it's similar to where it was in Q2 or is it currently in line with your 4% to 5% guidance for the quarter? Thanks.
Tracy, we don't provide intraquarter updates. What I can tell you is the business trend continues to support our third-quarter outlook and full-year guidance. We have not seen any meaningful change; demand remains healthy and the prebook trends in Europe and other regions are encouraging. That's the best way to frame our current quarter-to-date view.
At this time, I would like to turn the floor over to the company for any closing remarks.
Thanks, Latif. Thanks, everyone, for joining the call. Wishing everyone a great summer, and we look forward to connecting again in October. Thank you.
This concludes today's conference call. Please disconnect your lines at this time.