In a Nutshell: Levi Strauss & Co. (LS&Co.) said Tuesday that the company’s second fiscal quarter coincided with the roughly 10-week duration of the temporary closure of its own and customers’ stores in response to the COVID-19 pandemic, resulting in a significant adverse impact to revenues, earnings and cash flows. As stores have reopened, performance has trended better than the company’s expectations, however.
In response to the pandemic and the uncertainty of its duration, the company took several measures to mitigate the impact. It accelerated the deployment of several omnichannel initiatives, including virtual concierge, ship from store, buy online pick up in store, and continued the roll-out of its mobile app and loyalty program to augment its direct-to-consumer business. To reduce its costs and streamline operations, the company implemented cost-reduction and inventory-management initiatives.
Total inventories at the end of the quarter on May 4 increased 10 percent, net of reserves, compared to the year prior, despite a significant revenue decline, reflecting LS&Co.’s aggressive inventory actions in response to the COVID-19 business disruption and flexibility resulting from the high percentage of sales derived from core products.
The company enhanced its liquidity position by issuing an additional $500 million in aggregate principal amount of its 5 percent senior notes due 2025. Total liquidity was $2 billion at quarter’s end.
LS&Co. said roughly 90 percent of company-operated doors and franchisee doors have reopened globally, as well as the majority of third-party retail locations. While traffic and sales remain down to prior year, weekly sales performance in company-operated doors is sequentially improving, as store sales productivity in the final week of June as compared to prior year approached 80 percent, with nearly 40 percent of open company-operated store locations delivering positive net revenues growth compared to the same week in the prior year.
As store locations have reopened, the company’s e-commerce net revenues growth has remained strong, at nearly 70 percent growth for the month of June as compared to the same month in the prior year.
Although trends appear to be improving, the ultimate health and economic impact of the COVID-19 pandemic remains highly uncertain. The company expects that its business and results of operations, including net revenues, earnings and cash flows, will continue to be significantly adversely impacted for at least the balance of 2020, and there remains the possibility of additional COVID-19 related inventory and other charges.
Given the ongoing substantial uncertainty resulting from the COVID-19 pandemic and related economic impact, LS&Co. has withdrawn all guidance provided on Jan. 30, and is not providing further guidance.
Sales: Net revenue for the quarter declined 62 percent to $498 million compared to $1.31 billion in the year-ago period. The decrease was primarily due to the temporary closures of LS&Co.’s operated and third-party retail locations as a result of the coronavirus pandemic.
The decline was partially offset by 25 percent growth in its company-operated e-commerce business, including the benefit of accelerating its omnichannel initiatives, which after declining in March began to recover in April and accelerated to nearly 80 percent growth in May compared to the same month of the prior year. Company-operated e-commerce comprised 15 percent of total company net revenues in the second quarter, compared to 5 percent in the second quarter of the prior year, and growing at a faster rate due to LS&Co.’s digital initiatives and the pandemic’s impact to consumer shopping behaviors.
In the Americas, net revenues declined 59 percent to $283 million due to pandemic-related closures. The decrease was partially offset by growth in e-commerce revenue. After an initial slowdown in response to COVID-19, online traffic on the company’s e-commerce websites increased partway through the quarter, accelerating through May, in which U.S. company-operated e-commerce net revenues grew more than 100 percent compared to the same month of the prior year.
In Europe, net revenues declined 68 percent to $129 million due to the pandemic effect, with the exception of the e-commerce business, where increasing growth rates accelerated to 35 percent growth in May after an initial slowdown in response to COVID-19.
In Asia, net revenues decreased 61 percent to $86 million. The decline was across channels due to the impacts of COVID-19 and the temporary closures of company-operated and third-party retail locations in the region. Retail locations in China and the neighboring countries that were impacted earlier by COVID-19 began to reopen their doors mid-March and saw foot traffic improve sequentially during the quarter, whereas locations in the rest of the region closed mid-March and remained closed through the end of the second quarter. E-commerce revenue grew significantly driven by increased traffic.
Earnings: LS&Co. recorded a net loss for the quarter of $364 million, reflecting $242 million, pre-tax, in restructuring charges and inventory costs and other charges recorded in connection with COVID-19 business disruptions. This compared to net income of $29 million in the prior-year quarter.
Gross profit was $170 million compared to $700 million in the same quarter in the prior year. Gross margin was 34 percent of net revenues, down from 53 percent in the same quarter of the prior year. The decrease in gross profit and gross margin is primarily due to lower revenues across all regions and $87 million in inventory-related costs recorded in connection with COVID-19 business disruptions, including the recognition of incremental inventory reserves of $50 million and adverse fabric purchase commitments of $36 million, directly related to the expected impact of COVID-19 on forecasted sales and expected selling prices.
Selling, general and administrative (SG&A) expenses were $551 million, a 14 percent decline compared to $638 million in the same quarter in the prior year. SG&A in the second quarter of 2020 included COVID-19 related non-cash charges of $60 million in asset impairments primarily associated with the company’s store fleet and charges of $28 million related to customer receivables.
CEO’s Take: Chip Bergh, president and CEO of Levi Strauss & Co., said: “We started the year with strong momentum, but the global pandemic and economic crises had a significantly negative impact on our second quarter results, as our stores and most wholesale doors were closed around the world for the majority of the quarter. I’m proud of how the team stepped up in response, accelerating our activation of key e-commerce and omni-channel capabilities, proactively cutting costs and managing cash smartly, and finding innovative ways to connect the Levi’s brand with its fans. As part of our response, to enable us to become a leaner and more market-responsive organization, as well as give us greater confidence in our cost structure given the uncertainties around the impact of the virus, we have made the difficult decision to reduce our non-retail, non-manufacturing workforce by about 700 positions, or roughly 15 percent, which we expect will generate annualized savings of $100 million.”
“The pandemic is accelerating retail landscape shifts and consumer behavior in ways that play to the strength of the Levi’s brand,” Bergh added. “And we are doubling down on our digital transformation, incorporating the power of AI and data science, and leveraging our iconic brands to have an even stronger focus on Gen Z and sustainability. We believe this will enable us to further grow our market leadership position and emerge from this crisis a stronger company.”