Jeans giant Levi Strauss reported “significant” improvement in the fourth quarter from the prior three months, while posting a loss for the year.
In a Nutshell: Levi Strauss & Co. (LS&Co.) said Wednesday in reporting fourth-quarter and year-end financial results that it expects business and results of operations, including net revenues, earnings and cash flows, will continue to be significantly adversely impacted for at least the first half of 2021.
The company said there remains the possibility of additional COVID-19 related inventory and other charges. During the quarter, the company experienced temporary door closures in geographies affected by rising COVID-19 cases, with approximately 40 percent of the full store footprint in Europe, and 17 percent globally of all company-operated doors and franchisee doors currently closed and others operating on reduced hours.
While sales remain down compared to the prior year, LS&Co. continues to mitigate ongoing traffic declines by driving meaningfully higher conversion. As store locations have reopened, Levi Strauss’s e-commerce net revenues growth have been strong, at 38 percent growth for the quarter as compared to the prior year.
As the company 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, including 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.
Although quarterly trends appear to be improving sequentially, the recent resurgence of the virus underscores that the ultimate impact of the COVID-19 pandemic remains highly uncertain, it said.
“We delivered strong results through the last months of our fiscal year despite the ongoing impact of the pandemic, including beating our revenue and adjusted EPS expectations, while posting a record fourth-quarter gross margin,” Harmit Singh, chief financial officer of Levi Strauss & Co., said. “While the future impact of COVID-19 remains uncertain in the near term, our sequentially improving performance, financial discipline and focus on operational excellence have given us the confidence in our ability to execute our strategies against the things within our control, and, if conditions do not worsen, return the company to pre-pandemic revenues by the end of 2021, with adjusted EBIT margins of 12 percent or more.”
Total inventories, net of reserves, at quarter’s end decreased 8 percent compared to the year prior, reflecting the company’s inventory management efforts. Total available liquidity was $2.3 billion, and cash and cash equivalents at quarter’s end were $1.5 billion.
Sales: Net revenues for the fourth quarter ended Nov. 29 declined 12 percent to $1.39 billion, a significant sequential improvement from the reported third-quarter net revenue decline of 27 percent.
LS&Co. said the decrease was primarily due to the impacts of the COVID-19 pandemic, including reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter in certain markets. This was partially offset by the benefit of a 53rd week and Black Friday, which collectively benefited the year-over-year net revenues growth comparison by about three percentage points.
Direct-to-consumer (DTC) revenue declined 5 percent, as company e-commerce revenue increased 38 percent with growth across all regions, partially offsetting a decline in brick-and-mortar store revenues. The company’s global digital revenues, which includes owned e-commerce sites and the online business of its pure-play and traditional wholesale customers, grew approximately 34 percent compared to the same period in the prior year, and comprised approximately 23 percent of fourth-quarter 2020 revenues, up from 15 percent in the fourth quarter of the prior year.
Wholesale revenues declined 15 percent, a significant sequential improvement from the third-quarter decline of 29 percent.
In the Americas, net revenue fell 12 percent, an improvement from the third-quarter decline of 29 percent. The region’s DTC net revenues declined 5 percent and wholesale net revenues were off 15 percent as a result of the continued adverse impact of COVID-19. The decrease was partially offset by growth in the company’s e-commerce business and broader digital footprint due to 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, after a much stronger start to the quarter, net revenues declined 9 percent, as a surge in COVID-19 resulted in temporary store closures in much of the region in November. Despite the store closures, this was a significant sequential improvement from the third-quarter decline of 16 percent. The fourth-quarter net revenues decline was across channels, with the exception of e-commerce broader digital footprint, which experienced strong growth due to increased traffic and higher conversion.
In Asia, net revenues declined 14 percent, a significant improvement from the third-quarter decline of 42 percent. The fourth-quarter decrease in net revenues was due to the impacts of COVID-19 across channels and markets, with the exception of e-commerce, which grew in the region on increased traffic and higher conversion.
The most significant market impact was a $18 million reported decline in India where the impacts of the pandemic to shopper traffic remained severe, despite most stores being open during the period. The company is increasing its investment and focus on Asia, where the Levi’s brand has high brand awareness and significant opportunity to accelerate sales growth.
For the year, net revenue fell 22.7 percent to $4.45 billion compared to $5.76 billion in the prior year.
Earnings: The company reported net income for the fourth quarter of $57 million and adjusted net income of $81 million, as compared to $96 million and $108 million, respectively, in the fourth quarter of the prior year. The decline was primarily attributable to the adverse revenue impact of the pandemic. Higher interest expense reflected additional borrowing earlier in the year to enhance its liquidity position.
Operating income for the fourth quarter was $92 million as compared to $132 million in the same quarter in the prior year. primarily due to adverse impacts of the COVID-19 pandemic, including the recognition of $22 million of net restructuring charges.
Gross margin increased 100 basis points to 55.3 percent, its highest fourth-quarter gross margin in recent history. Adjusted gross margin increased 30 basis points to 54.6 percent, primarily due to price increases, a higher proportion of sales in the higher-margin direct-to-consumer channel, lower promotions and healthy inventory.
For the year, LS&Co. had a net loss of $127.14 million compared to net income of $394.98 million in the previous year.
CEO’s Take: Chip Bergh, president and CEO of Levi Strauss & Co., said: “In this most extraordinary year, I’m proud of the team and our accomplishments in the face of so much adversity. The steps we took on structural costs, cash management, agility and new capabilities helped drive results far ahead of our own expectations and give me great confidence in our future. We will double down on elevating our iconic brand, investing in direct engagement with our fans, advancing our fast-growing digital business and further diversifying our portfolio. As we continue to accelerate these strategic focus areas, we will emerge a stronger, more profitable, more agile company.”