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Posted by Thomas J. Ryan | Oct 7, 2022 | Feature, SGB Executive
Levi Strauss reduced its guidance for its fiscal year ended November 30 while reducing inventory buys for the first half of 2023 by approximately 25 percent due to ongoing supply chain disruption and macro-economic pressures, particularly in the U.S. and Europe.
Levi’s updated its guidance while reporting “solid” results for the third quarter that ended August 28, Chip Bergh, Levi’s president and CEO, said on a call with analysts, as EPS in the period slightly topped Wall Street expectations to offset a significant shortfall in revenues.
Bergh said market conditions had deteriorated since Levi’s last reported results in early July.
“As we moved through the third quarter, a confluence of pressures from inflation to falling consumer sentiment, to rising interest rates began to result in softer consumer demand, while our industry continued to experience supply chain disruption and a heightened promotional environment,” he said. “Not surprisingly, this made for a challenging quarter.”
For its year ended November 30, Levi’s now expects:
Third-Quarter Sales Miss Plan
In the quarter, revenues rose 1.3 percent to $1.52 billion, well below Wall Street’s consensus estimate of $1.6 billion. Sales were up 7 percent on a currency-neutral basis, primarily driven by the U.S., Asia and Latin America with broad-based increases in Average Unit Retail Prices (AURs).
DTC channel revenue grew 8 percent, driven by positive comp store sales across full-price and outlet stores, including in the U.S. due to increased traffic and AURs. E-commerce grew 16 percent with net revenues through all digital channels up 15 percent.
Adjusted gross margin in reported dollars was 56.9 percent, up more than 390 basis points versus 2019, yet contracting 60 basis points year-over-year, due to a 30 basis points unfavorable currency exchange rate impact, as well as the impact of higher product costs and lower full price sales, particularly in the U.S. relative to last year, partially offset by price increases and a favorable channel mix.
Adjusted SG&A expenses were up 6 percent year over year, at the lower end of expectations as spending was reduced as signs of a softening macro environment arrived. As a percentage of revenue, adjusted SG&A was 44.5 percent of sales, 180 basis points above the prior year period, reflecting higher distribution expenses and ongoing strategic investments in IT and its DTC business.
Net earnings fell to $173 million, or 43 cents a share, from $193 million, or 47 cents, a year ago. On an adjusted basis, earnings were down 18.3 percent to $161 million, or 40 cents a share, from $197 million, or 48 cents, a year ago, but exceeded Wall Street’s consensus estimate of 37 cents.
Third-Quarter Highlights
Bergh noted that while sales missed internal targets, for the first time in several quarters, Levi’s teams responded to the slowdown by reigning in costs to support a double-digit adjusted EBIT margin in the quarter. Adjusted EBIT margin was 12.4 percent, 240 basis points below the third quarter of 2021 on a reported basis, and 200 basis points lower on a constant-currency basis.
The team also minimized the impact of supply chain constraints to $30 million to $40 million, or about two to three percentage points of revenue growth.
Other highlights of the quarter included Levi’s brand delivering its highest third-quarter revenue in a decade with growth across categories and genders. He said, “We’ve made meaningful progress, winning over the next generation of fans, continuing to gain share with the 18-to-30-year age segment in the U.S., while maintaining our leadership position across consumers of all ages, and our unaided brand awareness remains well above competition across most markets.”
He also noted that strong pricing power lifted AURs up mid-single-digits despite a more promotional environment and overall gross margins remain strong and nearly 400 basis points higher than pre-pandemic levels. He further cited the DTC growth as a sign of Levi’s brand’s strength.
“Having strong powerful brands and a diversified business with scale matter during these volatile times,” added Bergh. “These advantages allowed us to grow global wholesale by 6 percent and total U.S. company revenue by 5 percent, despite a number of US wholesale customers slowing orders.”
He said Levi’s brand “significantly outperformed” the U.S. marketplace, pointing to NPD data showing that the overall jeanswear market was down mid-single-digits in the June through August quarter and the U.S. apparel market had slowed to 1 percent growth. He added, “I think it’s also important to note that despite the past three-month decline in the jeanswear category, it is still up mid-single digits versus pre-pandemic. Despite the quarterly category softening, we remain confident about the long-term trend of casualization continuing to be a tailwind for the business.”
Segment Performance
By segment, revenues in the Americas for Levi’s brand, Levi’s Signature and Denizen grew 3 percent on both a reported and currency-neutral basis to $805 million, driven primarily by higher AURs across channels. DTC’s growth of 8 percent was driven by company-operated full-line and outlet stores, which benefited from increased traffic and AURs, in addition to new stores. Wholesale growth of 2 percent was driven by international and the Levi’s brand in the U.S., partly offset by lower revenues of its value brands, Signature and Denizen. Overall, the Americas segment saw growth across all markets with the U.S. up 2 percent and notable momentum across Latin America, led by the strength in Mexico.
In Europe, revenues for Levi’s brand, Levi’s Signature and Denizen were 9 percent lower on a constant currency basis to $390 million, which includes the 4 percent negative impact from the suspension of its business operations in Russia. While macro pressures, including inflation and extreme heat negatively impacted the region, several of Levi’s large markets posted growth. Pricing actions delivered high-single-digit AUR growth to help offset softer consumer demand. Harmit Singh, CFO, said Levi’s “remains by far the most popular denim brand in Europe.”
In Asia, revenues for Levi’s brand, Levi’s Signature and Denizen were up 53 percent on a currency-neutral basis to $ 221 million despite COVID-related restrictions negatively impacting markets like China. Volumes and AURs both increased strength and wholesale and DTC both partially benefited from lapping wider spread COVID-related door closures last year. E-commerce was up 33 percent, while company-operated stores saw gains from traffic, AURs and new stores. The Asia segment excluding China grew 68 percent with broad-based growth across the market led by India, Malaysia, ANZ, Indonesia, and Thailand.
In its Other Brands segment (Dockers, Beyond Yoga), sales were up 44 percent, driven by 13 percent growth in Dockers and the September 2021 acquisition of Beyond Yoga.
Reported inventories increased 43 percent on a dollar basis. Approximately one-third relates to cost inflation and the normalization of last year’s abnormally low inventory level. Another third of the increase relates to the intentional earlier receipts of core inventory to mitigate supply chain risks and the U.S. implementation of a new ERP system in the second quarter of fiscal 2023. The final third was driven by an increase of goods in transit. Singh said, “Core product, which can be sold across multiple future seasons represented approximately two-thirds of total inventories and we are comfortable with the composition and quality of our inventory.”
Progress On Key Initiatives
Bergh noted that Levi’s made progress on its growth initiatives, including being “brand-led.”
Levi’s brand sales grew 6 percent versus prior year, and almost 10 percent ahead of 2019, continuing to build on success with looser fits. The trend toward looser fits in women’s was also accompanied by a shift from high to mid-rises, which were up 20 percent. The classic 501 style again posted double-digit growth across men’s and women’s. Product collaborations, such as a recent one with Ganni, are helping drive buzz while the brand’s second iteration of the “Buy Better, Wear Longer” campaign continues to resonate.
On its second priority, being “DTC-first,” Bergh noted that the 8 percent DTC growth was supported by mid-single digit growth at stores, boosted by increased traffic and AURs. E-commerce growth of 16 percent was driven by the Levi’s brand in Asia, Beyond Yoga and Dockers. E-commerce is now up 64 percent versus 2019.
Levi’s third priority diversifying its portfolio also made progress with 8 percent growth at women’s (versus 6 percent for men), 12 percent growth in tops, and 8 percent growth internationally.
Dockers’ 13 percent growth reflects the success of an updated positioning around its California casual aesthetic. The gains were driven by both AUR and volume with profitability exceeding plan.
Beyond Yoga contributed $22 million to revenue with solid consumer demand in the quarter with e-commerce sales up strong double digits on a pro-forma basis. Bergh said about Beyond Yoga, “It launched at 28 colleges across the country as the brand continues to build awareness and reach new consumers. Perhaps most exciting at the end of last month, Beyond Yoga opened its first permanent store located in Santa Monica, showcasing the brand’s full array of category offerings for the first time. While we’re just getting started, we believe there is an attractive long-term opportunity to grow the brand’s presence through retail.”
Photo courtesy Levi Strauss
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