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Levi’s Swings Back to Black in Q3

While revenue and income fell year over year, Levi Strauss executives said signs of improvement are emerging amid ongoing pandemic woes.

In a Nutshell: Levi Strauss & Co. had what executive vice president and chief financial officer Harmit Singh described as a “bounce-back” third quarter, “delivering profitability and generating strong cash flows.”

Singh said Levi’s demonstrated the strength of its brand in gross margins, and revenues have been recovering from Covid-19-related disruptions faster than expected, driven by e-commerce, international and the women’s business, particularly within Europe and in the United States.

“Inventory is healthy headed into holiday, we are making investments in our digital transformation, and our cost and working capital actions have put us on a clear and accelerated path to achieving our adjusted EBIT margin ‘North Star’ of at least 12 percent when revenues recover to pre-Covid levels,” Singh said.

The company returned to positive adjusted free cash flow generation in the third quarter, generating $183 million, reflecting the company’s focus on financial discipline, cost controls, cash and working capital.

While sales remain down compared to prior year, the company said it continues to mitigate ongoing traffic declines by driving meaningfully higher conversion. As store locations have reopened, the company’s e-commerce net revenues growth has remained strong, at 52 percent growth for the quarter as compared to the prior year.

Levi’s global digital business, which includes its e-commerce sites, as well as the online business of its pure-play and traditional wholesale customers, comprised approximately 24 percent of third-quarter 2020 revenues, double what it was a year prior, as consumer spending continued to shift toward online shopping.

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Although trends appear to be improving sequentially, and at a faster pace than previously expected, the ultimate impact of the Covid-19 pandemic remains highly uncertain, Levi’s said. 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.

Sales: Net revenue for the third quarter ended Aug. 23 declined 27 percent to $1.06 billion from $1.45 billion in the prior-year period. The decrease was primarily due to the impacts of Covid-19, including reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter and in certain markets.

This followed a net loss for the second 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.

Wholesale revenues declined 29 percent and direct-to-consumer revenues fell 22 percent. Direct-to-consumer locations and e-commerce comprised 29 percent and 8 percent, respectively, of total company net revenues in the third quarter.

In the Americas, net revenues declined 29 percent to $550 million, with lower revenues across wholesale and company-operated stores. The decrease was partially offset by growth in the company’s e-commerce business and broader digital footprint, with increased traffic and higher conversion as consumer spending continued to shift towards online shopping experiences, as well as growth in the Signature by Levi Strauss & Co. brand.

In Europe, net revenues declined 16 percent to $390 million, with declines across markets, channels, brands and categories due to the continued adverse impact of Covid-19, with the exception of the company’s e-commerce business and broader digital footprint, which experienced strong growth during the quarter on increased traffic and higher conversion.

In Asia, net revenues decreased 42 percent to $123 million, also falling across channels and markets from the ongoing economic fallout of the pandemic. The most significant impact was a $51 million decline in India, where several states remained in government-mandated lockdown throughout the third quarter. Excluding India, net revenues in the region declined 24 percent. E-commerce in the region grew during the quarter.

Earnings: Levi’s recorded net income for the quarter of $27 million compared to net income of $124 million in the year-ago period. The decline was primarily attributable to the adverse revenue impact of Covid-19, higher interest expense reflecting the company’s actions to enhance its liquidity position and a higher tax rate.

Operating income of $92 million declined compared to $171 million in the same quarter in the prior year, primarily due to Covid-19, including lower net revenues, partially offset by lower selling, general and administrative (SG&A) expenses reflecting the company’s cost-reduction initiatives.

Gross profit was $577 million compared to $767 million in the same quarter in the prior year. Gross margin was 54.3 percent of net revenues, up from 53 percent in the same quarter of the prior year. The increase in gross margin was mainly attributed to price increases, a higher proportion of sales in the higher-margin direct-to-consumer channel, and a $7.9 million reduction in estimated COVID-19 related inventory charges largely for adverse fabric purchase commitments.

CEO’s Take: Chip Bergh, president and CEO of Levi Strauss & Co., said: “As we continue to navigate the Covid-19 pandemic and its impact, we are laser focused on the areas that will drive value and enable us to emerge stronger on the other side, including elevating our already iconic brand, investing in digitization, and accelerating our efforts to diversify across geographies, product categories and distribution channels, including doubling down on our fast-growing direct-to-consumer business. These investments are already paying off. We exceeded our expectations for the third quarter, our total digital business has doubled as a share of total net revenues and Levi’s remains the global leader in denim, where our women’s business continues to take market share. And the brand has gotten even stronger during the pandemic.”