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Levi’s Sees ‘Strong’ Recovery Despite Q1 Revenue Tumble

Revenue and income were down in the first quarter, but Levi Strauss & Co.’s CEO sees “faster-than-expected recovery” in the making.

In a Nutshell: Levi Strauss raised its fiscal first-half 2021 net revenues outlook to 24 percent to 25 percent growth compared to the first half of 2020 and raised its first-half adjusted earnings per share (EPS) estimate to 41 cents to 42 cents.

The company said while it continues to navigate the COVID-19 pandemic and its impact, it remains focused on the areas that it believes will drive value and enable it to emerge stronger on the other side. This includes elevating its brands, investing in digital tools and capabilities, and accelerating efforts to diversify across geographies, product categories and distribution channels, including its direct-to-consumer and digital businesses.

During the quarter, the company said it experienced temporary door closures in geographies affected by lockdowns associated with COVID-19 cases, with approximately one-third of the full store footprint in Europe and 15 percent of doors globally closed during three months though February. Currently, more than 40 percent of the full store footprint in Europe is closed, with others operating on reduced hours, Levis Strauss noted.

Although quarterly trends continue to improve sequentially, the ultimate impact of the pandemic remains highly uncertain, the company said. Levi Strauss expects its business and results of operations, including net revenues, earnings and cash flows, will continue to be significantly adversely impacted at least through the second quarter of fiscal 2021 that runs through May, and said there remains the possibility of additional COVID-19 related inventory and other charges.

Selling, general and administrative (SG&A) expenses of $583 million were around 2019 levels–a 12 percent decline compared to first quarter of 2020–with a $78 million decline reflecting the company’s cost-savings actions, net of continuing to invest in its omni-channel, AI and digitization initiatives.

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Total inventories, net of reserves, at quarter end decreased 2 percent compared to a year prior. Total available liquidity was $2.8 billion, including cash and cash equivalents of $2 billion.

Sales: Net revenues for the first quarter ended Feb. 28 declined 13 percent to $1.31 billion compared to the first quarter of 2020, which the company noted were not material to the results of operations since it came prior to the impacts of the pandemic.

Levi Strauss said the decrease was primarily due to the economic impacts of pandemic, including reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter in certain markets. Additionally, the first quarter of fiscal 2021 did not include the benefit of a Black Friday, as compared to the first quarter of fiscal 2020, which adversely impacted the year-over-year net revenue comparison by approximately 3 percent.

The company’s global digital net revenues, which include net revenues attributable to its e-commerce sites, as well as the online business of its pure-play and traditional wholesale customers, grew approximately 41 percent compared to the same period in the prior year, and comprised about 26 percent of first-quarter 2021 net revenues, up from 16 percent a year earlier. Within digital, net revenues from the company’s e-commerce sites were 10 percent of first-quarter 2021 total company net revenues, up from 7 percent in the prior year.

Wholesale net revenue declined 4 percent, a significant sequential improvement from the fourth quarter of fiscal 2020, reflecting strong performance in the company’s global digital business. Direct-to-consumer (DTC) net revenues fell 26 percent, driven by lower traffic to brick-and-mortar stores due to the pandemic, particularly in tourist locations, which comprise a substantial portion of the company’s brick and mortar network.

In the Americas, net revenues declined 14 percent, with the region’s DTC net revenues declining 29 percent and wholesale net revenues off 5 percent. The decrease in net revenues was partially offset by 15 percent growth in company operated e-commerce business, as well as growth of U.S. wholesale driven by strength in the Levi’s and Signature brands.

In Europe, net revenue fell 16 percent due mainly to store closures. During the quarter, approximately one-third of the region’s stores were closed, primarily concentrated in higher volume markets. Sales were strong in markets with fewer closure restrictions, reflecting consumer demand and strength of the brand. The company’s e-commerce business and broader digital footprint experienced growth during the quarter of 35 percent and 73 percent, respectively.

In Asia, net revenue dipped 5 percent due to the impacts of COVID-19 across channels and markets, partially offset by e-commerce and the region’s broader digital footprint, which experienced strong growth during the quarter of 54 percent and 68 percent. respectively. China grew 30 percent from the prior year, with growth across all channels.

Earnings: Net income for the quarter was down 7 percent to $143 million from $153 million in prior-year period. The decline was mainly attributed to the adverse revenue impact of COVID-19, as well as higher interest expense, reflecting the company’s additional borrowing in the prior year to enhance its liquidity position.

Gross margin increased 250 basis points to 58.2 percent, a record high for the company. Adjusted gross margin increased 200 basis points to 57.7 percent versus the year-ago quarter, thanks to a better mix within wholesale, price increases and lower promotions.

Diluted EPS for the quarter was 35 cents and adjusted diluted EPS was 34 cents.

CEO’s Take: Chip Bergh, CEO of Levi Strauss & Co., said: “We’ve started the year strong, beating our internal expectations even as we are lapping a particularly good quarter in the prior year. Our strong results this quarter were driven by faster-than-expected recovery in our business from our relentless focus on the priorities that are driving outsized performance.

“We continue to lean into our strategies–leading with our brands, investing in direct-to-consumer and diversifying our business–while still operating prudently to manage the ongoing uncertainty, especially in Europe,” Bergh added. “As the vaccine rollout continues and consumer excitement returns, I am more confident than ever that we will emerge from the pandemic a stronger business and drive sustainable, profitable growth.”