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Newly Public Levi Strauss Posts Gains in Income, Plans to Open 100 New Stores

Levi Strauss hit the ground running in its first financial report since going public, turning a profit from year-ago loss and setting plans for expansion.

In a Nutshell: Levi Strauss & Co. wasted no time in saying where it was investing some of the $623.3 million it raised in its IPO, saying it anticipates capital expenditures of $190 million to $200 million and nearly 100 new company-operated store openings in fiscal 2019.

The San Francisco-based company offered roughly 36.7 million shares on the New York Stock Exchange last month, and its executives and industry observers said they expected investment in its retail network and brand extensions, as well as possible acquisitions.

Levi Strauss said its expectations for fiscal 2019 compared to fiscal 2018—when it reported its financials, even though it was publicly traded because it held public debt—include constant-currency net revenues growth of mid-single digits and adjusted EBIT margin flat-to-slightly up.

Due to the timing of its fiscal year ending the final Sunday of November, fiscal 2019 will not contain the benefit of a Black Friday, Levi’s said, which normally represents about a half-a-point of annual net revenues and an additional 25 basis-points of adjusted EBIT margin.

Sales: Net revenue for the first quarter ended Feb. 24 grew 7 percent to $1.44 billion from $1.34 billion a year earlier.

Levi’s said net revenue related to the company’s direct-to-consumer (DTC) business rose 10 percent, primarily due to performance and expansion of the retail network, as well as e-commerce growth. The company had 70 more company-operated stores at the end of the first quarter of 2019 than it did a year earlier.

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Net revenue related to the company’s wholesale business grew 5 percent, reflecting growth in all regions. In the Americas, net revenue grew 9 percent to $717 million, reflecting higher revenues across both wholesale and direct-to-consumer channels across the region.

In Europe, net revenue rose 3 percent to $465 million, reflecting continued broad-based growth across direct-to-consumer and wholesale channels. In Asia, net revenue grew 8 percent to $253 million, buoyed by strong performance across traditional wholesale, franchisee and direct-to-consumer channels. Revenue growth was broad-based across the region’s markets, including China.

Earnings: First quarter net income was $147 million compared to a loss of $19 million in the year-ago period, primarily due to charges in the prior year from the transitional impact of the 2017 Tax Cuts and Jobs Act of $99 million for the re-measurement of deferred tax assets and liabilities.

Operating income for the first quarter rose 15 percent to $201 million compared to the same quarter of fiscal 2018, reflecting higher revenues and a 100 basis-point increase in operating margin.

Gross margin for the first quarter was 54.6 percent of net revenues compared with 54.9 percent in the same quarter of fiscal 2018, primarily due to 90 basis-points of unfavorable transactional currency impact, which was partially offset by the margin benefit from growth in the company’s global direct-to-consumer channel.

In the Americas, operating income grew 11 percent on higher net revenues and lower advertising costs, which were partially offset by higher direct-to-consumer costs and increased distribution costs to support higher volume. European operating income increased 6 percent, driven by net revenue growth and a higher gross margin from a shift toward the direct-to-consumer channel, partially offset by higher direct-to-consumer and distribution costs.

Operating income in Asia was up 6 percent on the strength of higher revenues that balanced a decline in gross margin from product cost investment.

CEO’s Take: Chip Bergh, president and CEO, said: “We delivered our sixth consecutive quarter of double-digit constant-currency revenue growth. Growth was broad-based across all three regions and all channels, demonstrating that our strategies are working, and our investments are paying off.”