Coming off a third quarter with mixed results—net revenues rose 3.8 percent to $1.45 billion but net income fell 4.3 percent to $124.5 million—Levi Strauss & Co. executives detailed a three-pronged plan to improve performance.
It all starts with the core Levi’s brand, according to Charles Bergh, president and CEO, who told analysts on a conference call, “Levi’s is the No. 1 denim brand in the world by a mile and we are maintaining our share leadership position by putting the consumer and our values at the center of everything we do.”
That doesn’t mean that challenges don’t exist, especially in the U.S. wholesale channel that markets to the department store sector. In addition, the company and brand must contend with ongoing currency conditions in the international and sourcing arenas due to the strong dollar and geopolitical issues involving the U.S.-China trade war and violent civil unrest in Hong Kong.
“We’re also taking a segmented approach to U.S. wholesale overall, to drive the business within the broader channel, deploying various strategies to capture growth and these strategies are working,” Bergh said.
He noted that the Levi’s brand delivered 8 percent revenue growth in the quarter on top of 12 percent growth a year ago. The key is to “continuously re-invent the brand and lead the industry through new fits, innovations and bold marketing,” Bergh said.
In that vein, the company continued its investment in digital innovation by launching Future Finish, an online customization experience on Levi.com that leverages the company’s FLX technology to easily create a custom pair of Levi’s and “puts the power of personalization directly into the consumer’s hands,” at a premium price, Bergh said.
New collaborations are another example of regular reinvention, the CEO noted. In the quarter, this included Hello Kitty and Stranger Things, which he said generated billions of impressions for the brand and gave consumers a reason to make repeat visits to stores.
Levi’s again collaborated with Nike on the “Nike By You” program to allow consumers to create their own custom-made Nike’s with Levi’s fabrics and trends using FLX technology. The two brands also partnered to design exclusive co-branded sneakers available in select Levi’s Stores, which sold out in three days, according to Bergh.
Early in the fourth quarter, Levi’s released the next iteration of the trucker jacket with Jacquard by Google that uses advanced technology and patented conductive fibers woven into the fabric of the jacket to seamlessly and wirelessly connect the jacket to a smartphone.
On top of that, the brand recently announced a collaboration with Disney’s “Star Wars” that will be available in stores and online on Nov. 1.
The triple play
Turning to what Bergh described as “where-to-place” strategic choices, the first priority is to focus on the profitable core business, which comprises men’s bottoms, Top 10 wholesale customers and Top 5 mature markets. He said revenues in each of these three components of the profitable core grew in the third quarter.
Important elements in obtaining profitability include securing incremental distribution, such as with premium customers, and expanding access to “better and best” products to U.S. consumers to sell as much goods at full price as possible. Also key is expanding pure-play digital and the wholesale dot.com business, Bergh said, while maintaining brand integrity and healthy margins, and “growing with our partners in the mass channels, bringing quality products to consumers at great price points.”
The second prong in the grand plan is to diversify the business by expanding more into tops, women’s under-penetrated markets and value brands.
In the quarter, total tops growth of 17 percent was balanced across men’s and women’s, driven by trucker jackets, sweatshirts and T-shirts, each examples of diversification in the category.
“Our third way to place strategic choice is to become a leading world-class omnichannel retailer,” Bergh said. “Global DTC for us includes the brick-and-mortar stores and e-commerce sites that we operate. Revenue growth from our brick-and-mortar stores was up 10 percent globally. Each of our emerging markets of India, Russia and Brazil posted another quarter of double-digit growth. And in China, net revenues grew 2 percent.”
The CEO noted that omnichannel capabilities were enhanced by the rollout of ship-from-store and, Levi’s is leveraging RFID technology at more than 500 stores across 17 countries and growing.
“Both of these initiatives allow us to optimize inventory, augment sales and improve store productivity,” he said. “We’re seeing an uplift in stores where we have rolled this out.”
Bergh emphasized that China is “a huge opportunity for us,” even as it represents just 3 percent of the total business at the moment.
“We’ve been evolving our China business over the last couple of years,” he said. “We took a number of steps in China last year to set ourselves up for success long term. We took back a number of franchise stores in Beijing and Shanghai where we own and operate our own doors. We stopped heavily discounting in Tmall and now we’re basically selling predominantly full-priced products, and we are now moving to premiumize and super premiumize that marketplace, because that’s what’s working there.”
Hong Kong was a notable exception in the region, Bergh noted. The democratic uprising there impacted traffic and caused some Levi’s stores to close temporarily, “costing the region a vital point of growth.”
Harmit Singh, executive vice president and chief financial officer, commenting on tariffs on Chinese imports into the U.S., said, “While it remains too difficult to predict what the future holds for tariff policy, we have proactively taken steps to insulate our business from the long-term negative impact of these kind of measures. As such we…estimate the impact of tariff on imports to the U.S. from China will have a negligible financial impact to our business.”