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Levi’s Gross Margins Were Up 55% in Q1

Levi Strauss said stores have reopened in China and the company expressed confidence it will endure the pandemic.

In a Nutshell: Levi Strauss & Co. said Tuesday that given the substantial uncertainty introduced by the global spread of the COVID-19 pandemic and subsequent economic impact, it has withdrawn all guidance provided on Jan. 30 and is not providing further guidance at this time.

The company also noted that the mid-quarter outbreak of coronavirus adversely impacted its first-quarter net revenues in Asia by an estimated $20 million. Prior to COVID-19 leading to store closures in mid-January, the company’s net revenues growth in mainland China was double digits.

At the end of the quarter, nearly all company-operated owned and franchisee doors in mainland China were closed. Currently, all company-operated doors and all but six franchisee doors have reopened there, including Levi’s beacon store in Wuhan. While traffic and sales remain down to prior year, weekly sales performance is sequentially improving, with digital sales in the market trending toward year-over-year growth.

Since mid-March, in response to the pandemic, the company has temporarily closed all its doors, both company-operated and franchise, in the Americas and Europe, as well as most doors in Asia outside greater China, South Korea and Japan. Accordingly, the adverse impact to the company’s second-quarter net revenues, earnings and cash flows is expected to be materially significant.

Cash and cash equivalents at the end of the first quarter of $874 million and short-term investments of $84 million were complemented by $820 million available under the company’s revolving credit facility, resulting in a total liquidity position of approximately $1.8 billion. Subsequent to quarter end, the company drew $300 million on its revolving credit facility.

Total inventories were down 7 percent compared to the corresponding prior-year period, and the composition of inventory was healthy and primarily core product heading into the second quarter, he company said.

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Sales: Net revenue for the first quarter ended Feb. 23 increased 5 percent to $1.51 billion. The quarter benefitted by the inclusion of Black Friday compared to last year, adding about 3 three percentage points, offset by the adverse impact of COVID-19 and the continuing unrest in Hong Kong, estimated to be approximately 2 percentage points.

The company’s direct-to-consumer (DTC) net revenue grew 13 percent, with Black Friday in the current year benefiting the year-over-year DTC growth comparison by about 7 percentage points, and total company revenues by three percentage points. The remainder of the DTC growth was due to expansion and performance of the retail network and e-commerce growth.

Net revenue from the company’s wholesale business rose 1 percent, reflecting growth in Europe and Asia partially offset by a decline in the Americas. Net revenues from tops grew 5 percent, bottoms grew four percent, women’s grew 12 percent and men’s grew two percent, all in constant currency.

Earnings: Net income in the first quarter was up 4 percent to $153 million, and adjusted net income rose 8 percent to $162 million, primarily due to a lower income tax rate, offset in part by the timing of advertising and other administrative costs.

Gross margin increased 110 basis points to 55.7 percent, the company’s highest quarterly gross margin in its recent history, reflecting the benefit of price increases, direct-to-consumer and international sales growth, and a reduction in sales to the off-price channel.

Adjusted earnings before interest and taxes (EBIT) decreased 8 percent to $189 million in the period, adverse impacted by COVID-19 by approximately $10 million.

CEO’s Take: Chip Bergh, president and CEO of Levi Strauss & Co., said: “Our first quarter results underscore the strength of the Levi’s brand and the efficacy of our strategies to diversify our business, both of which will be crucial to coming out of the current crisis stronger than ever. As this human and economic tragedy unfolds globally over the coming months, we are taking swift and decisive action that will ensure we remain a winner in our industry.

“The Levi’s brand has never been stronger, our balance sheet is solid and we have an experienced leadership team that is not afraid to take action that will help us not only weather this crisis, but transform our business for the better,” Bergh added. “I believe the true character of a company is shown in a time of crisis, and as we have in the past, we will navigate this one by leveraging our strengths and seizing opportunities that will help us continue to thrive over the long-term.”